This project was made possible by a grant from the Office of the

Attorney General of California, from the National Mortgage Fraud

Settlement, to assist California consumers.

January 2014 Newsletter

New RESPA Rules Change Qualified Written Request

Procedure1

RESPA provides mortgage borrowers with the right to dispute

servicer errors and to obtain account information by sending a

“qualified written request.”2 The Consumer Financial Protection

Bureau (CFPB) has substantially revised the prior qualified written

request procedure. New regulations that take effect on January 10,

2014 create two separate processes: one for resolving errors on a

borrower’s account and the other for requesting information regarding

the account. The final 2013 RESPA Servicing Rule expands the scope

1 This article is the first in a two-part series authored by John Rao for the National

Consumer Law Center’s eReports service. Printed here with permission of the author

and NCLC. Copyright © 2014 National Consumer Law Center, Inc. All rights

reserved. 2 12 U.S.C. § 2605(e)(1)(B). A borrower inquiry made under section 2605(e) is referred

to as a “qualified written request,” which “includes a statement of the reasons for the

belief of the borrower, to the extent applicable, that the account is in error or

provides sufficient detail to the servicer regarding other information sought by the

borrower.”

In this issue—

RESPA’s “Qualified Written Request”

gets a makeover: new “notices of error”

and “requests for information”

Recent case summaries and regulatory

updates

Announcements—

We have updated our Litigating under

HBOR Practice Guide! The new edition,

current through 2013, is available on our

website, http://calhbor.org/resources/.

Sign up now for two webinars breaking

down the new CFPB servicing rules, and

our live HBOR training in Fresno. See

information at the end of the newsletter.

2

of these borrower inquiries, effectively overruling several court

decisions that had limited the application of qualified written requests.

Is It a QWR, NOE or RFI (or All Three)?

The Regulation X provisions that implement RESPA section 2605(e)

no longer refer to a qualified written request.3 Rather, the Regulation

X amendments establish separate qualifications and procedures

depending upon whether a written inquiry is a “notice of error” sent

under Regulation X § 1024.35 or a “request for information” sent under

Regulation X § 1024.36. As under the prior regulation, the same

written inquiry from the borrower can both dispute a servicer action

and seek information, and therefore a request for information and a

notice of error can be combined in the same writing or sent as separate

writings.4

Despite the new changes and in recognition that RESPA itself still

refers to a qualified written request, the CFPB has indicated that a

qualified written request that properly asserts an error under §

1024.35 or seeks information under § 1024.36 is a notice of error or

request for information for purposes of these respective regulations.

However, the CFPB’s Official Interpretations to Regulation X makes

clear that a qualified written request is “just one form that a written

notice of error or information request may take.”5

Thus, the requirements for compliance with a notice of error or

request for information apply irrespective of whether a servicer

receives a qualified written request. In other words, a written inquiry

can be a notice of error or request for information even if it is not a

qualified written request. What is less clear under the CFPB regime is

whether a written correspondence can be a qualified written request

3 Reg. X, 12 C.F.R. §§ 1024.35(a) and 36(a) (effective Jan. 10, 2014). 4 See Amini v. Bank of Am. Corp., 2012 WL 398636 (W.D. Wash. Feb. 7, 2012); Luciw

v. Bank of Am., 2010 WL 3958715 (N.D. Cal. Oct. 7, 2010) (statute is drafted in the

disjunctive so that request for account information alone, without statement that

account is in error, is a valid qualified written request); Goldman v. Aurora Loan

Servs., L.L.C., 2010 WL 3842308 (N.D. Ga. Sept. 24, 2010) (same); Rodeback v. Utah

Fin., 2010 WL 2757243 (D. Utah July 13, 2010) (same). 5 Official Interpretation, Supplement 1 to Part 1024, ¶ 30(b)-(Qualified written

request)-1, effective Jan. 10, 2014).

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requiring compliance under RESPA section 2605(e) if it does not

satisfy the requirements for being either a notice of error under section

1024.35 or a request for information under section 1024.36.

Requirements for Notice of Error

A servicer is required to respond to any written notice it receives

from a borrower that asserts an error covered by section 1024.35.6 A

covered error must fall within one of the following categories:

Failing to accept a payment that conforms to the servicer’s

written requirements for making payments;

Failing to apply an accepted payment under the terms of

the mortgage loan and applicable law;

Failing to credit a borrower’s payment as of the date of

receipt in violation of 12 C.F.R. § 1026.36(c)(1);7

Failing to pay taxes, insurance, and other escrow items in

a timely manner as required by 12 C.F.R. § 1024.34(a),8 or

to refund an escrow account balance upon loan payoff as

required by 12 C.F.R. § 1024.34(b);9

Imposing a fee or charge that the servicer lacks a

reasonable basis to impose upon the borrower;

Failing to provide an accurate payoff balance amount upon

a borrower’s request in violation of 12 C.F.R. §

1026.36(c)(3);10

Failing to provide accurate information to a borrower

regarding loss mitigation options and foreclosure, as

required by 12 C.F.R. § 1024.39;11

Failing to transfer accurately and timely information

relating to the servicing of a borrower’s mortgage loan

account to a transferee servicer;

Making the first notice or filing required by applicable law

for any judicial or non-judicial foreclosure process in

violation of 12 C.F.R. § 1024.41(f) or (j);12

6 Reg. X, 12 C.F.R. § 1024.35(b) (effective Jan. 10, 2014). 7 See NCLC Foreclosures, § 9.6.3 (4th ed. and 2013 Supp.). 8 Id. at § 9.2.4. 9 Id. at § 9.2.4.2. 10 Id. at § 9.6.5. 11 Id. at § 9.2.6. 12 Id. at § 9.2.8.7.

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Moving for foreclosure judgment or order of sale, or

conducting a foreclosure sale in violation of 12 C.F.R. §

1024.41(g) or (j);13 or

Any other error relating to the servicing of a borrower’s

mortgage loan.14

Many of the covered errors relate to duties imposed on servicers by

other RESPA or Regulation X provisions. Thus, a determination of

whether a notice of error is appropriate or whether a servicer has

adequately responded to a notice will be guided by these other

provisions.

One error category that is not addressed directly by other

regulations is a servicer’s imposition of unreasonable fees on the

borrower. The CFPB’s Official Interpretations for this rule provides

some examples of unreasonable fees. A servicer lacks a reasonable

basis to impose fees that are not bona fide, such as (1) a late fee for a

payment that was not late; (2) a charge imposed by a service provider

for a service that was not actually rendered; (3) a default property

management fee for borrowers that are not in a delinquency status

that would justify the charge; or (4) a charge for force-placed insurance

in a circumstance not permitted by Regulation X section 1024.37.15

In the analysis provided when issuing the final rule, the CFPB

discussed the borrowers’ right to assert a notice of error based on a

servicer’s failure to provide accurate information about available loss

mitigation options. The CFPB stated that “it is critical for borrowers to

have information regarding available loss mitigation options,” and that

that this access should include “accurate information about the loss

mitigation options available to the borrower, the requirements for

receiving an evaluation for any such loss mitigation option, and the

applicable timelines relating to both the evaluation of the borrower for

the loss mitigation options and any potential foreclosure process.”16

The CFPB also noted that servicers are typically required to provide

13 Id. 14 Reg. X, 12 C.F.R. § 1024.35(b) (effective Jan. 10, 2014). 15 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(b)-2 (effective Jan.

10, 2014). 16 See Section-by-Section Analysis, § 1024.35(b)(7), 78 Fed. Reg. 10742 (Feb. 14,

2013).

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borrowers with information about loss mitigation options and

foreclosure under the National Mortgage Settlement and servicer

participation agreements with the Department of the Treasury, HUD,

Fannie Mae, and Freddie Mac, and that “providing such information to

borrowers is a standard servicer duty.”17

Importantly, the new notice of error rule permits the borrower to

dispute errors related to the transfer of servicing. The final 2013

RESPA Servicing Rule imposes a general obligation on transferor and

transferee servicers to have the capacity to accurately transfer

information and download data for transferred mortgage loans from

and onto their servicing platforms.18 The CFPB describes the accurate

and timely transfer of information on a borrower’s mortgage account as

a “standard servicer duty.”19 This general requirement is found in

Regulation X § 1024.38, which is one of the few new regulations that is

not privately enforceable. However, it is enforceable under the error

resolution procedure. If the borrower believes that information has not

been accurately transferred, a servicer’s failure to correct the error can

lead to liability under RESPA. The CFPB’s analysis of this provision

notes that “by defining an error in this way, a borrower will have a

remedy to ensure that a transferor servicer provides information to a

transferee servicer that accurately reflects the borrower’s account

consistent with the obligations applicable to a servicer’s general

servicing policies and procedures.”20

Non-Covered Errors

The CFPB’s Official Bureau Interpretation provides examples of

“noncovered errors” that are consistent with matters generally not

considered to be related to the servicing of a mortgage loan. A servicer

is not compelled to respond to a written notice sent by the borrower

that asserts an error relating to the origination, underwriting, and

17 Id. 18 Reg. X, 12 C.F.R. § 1024.38(b)(4) (effective Jan. 10, 2014); § 9.4, infra. 19 See Section-by-Section Analysis, § 1024.35(b)(8), 78 Fed. Reg. 10,743 (Feb. 14,

2013). 20 Id.

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subsequent sale or securitization of a mortgage loan.21 Additionally, an

asserted error relating to the determination to sell, assign, or transfer

the servicing of a mortgage loan is not a covered error. In contrast, the

failure to transfer accurately and timely information relating to the

servicing of a borrower’s mortgage loan account to a transferee servicer

as discussed above is a covered error.22

General “Catchall” for Errors Relating to Servicing of Loan

When the CFPB initially proposed the error resolution rule, it

contained an exclusive list of nine covered errors.23 The list of specific

covered errors did not include a general category for errors related to

the servicing of the borrower’s loan. NCLC and other consumer

organizations submitted comments noting that RESPA section 2605(e)

is drafted broadly and does not contain a finite list of potential errors,

and that the Dodd-Frank Act amendment adding subsection

2605(k)(1)(C) requires servicers to correct errors relating to “standard

servicer duties.” It was also pointed out that the proposed rule would

fail to address future servicing problems as standard servicer’s duties

change over time.

In response to these comments, the CFPB added to the final rule a

catch-all category for “any other error relating to the servicing of a

borrower’s mortgage loan.”24 The CFPB agreed with “consumer

advocacy commenters that the mortgage market is fluid and constantly

changing and that it is impossible to anticipate with certainty the

precise nature of the issues that borrowers will encounter.”25

Servicers will likely argue that a notice of error asserting an error

under the catch-all provision is ineffective unless it pertains to a

servicing duty set out in the definition of “servicing” provided in

21 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(b)-1 (effective Jan.

10, 2014). 22 Id. 23 See Section-by-Section Analysis, § 1024.35(b)(11), 78 Fed. Reg. 10,743/-/44 (Feb. 14,

2013). 24 Reg. X, 12 C.F.R. § 1024.35(b)(11) (effective Jan. 10, 2014). 25 See Section-by-Section Analysis, § 1024.35(b)(11), 78 Fed. Reg. 10,744 (Feb. 14,

2013).

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RESPA section 2605(i)(3),26 relying on court opinions from cases

concerning qualified written requests decided before the 2013

amendments to Regulation X became effective.27 These pre-January

10, 2014 court opinions no longer have precedential value based on the

substantial changes made to Regulation X by the 2013 amendments.

Although the CFPB retained the statutory definition of servicing in

Regulation X section 1024.2, amendments to regulations under both

Regulation X and Regulation Z recognize that standard servicer duties

have greatly expanded since the 1990 Servicer Act amendments to

RESPA. For example, Subpart C of Regulation X now includes

regulations dealing with servicing operations not contemplated by the

definition of “servicing” in RESPA section 2605(i)(3), such as force-

placed insurance, disclosure of mortgage owners, foreclosure

avoidance, and loss mitigation. Regulation X also now includes a

separate section that describes general servicing policies, procedures,

and requirements, based on the CFPB’s analysis of servicing industry

practices.28 These significant regulatory changes and developing

industry practices must be considered when determining whether an

error asserted under the catch-all provision in section 1024.35(b)(11) is

related to the servicing of a borrower’s mortgage loan.

Notice of Error for Failure to Correctly Evaluate Loss

Mitigation Options

This leads to the question of whether a borrower can assert as an

error under the catch-all provision in section 1024.35(b)(11) a servicer’s

failure to correctly evaluate a borrower for a loss mitigation option?

26 The term “servicing” is defined in section 2605(i)(3) to mean “receiving any

scheduled periodic payments from a borrower pursuant to the terms of any loan,

including amounts for escrow accounts . . . 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.” 27 See, e.g., Bilek v. Bank of Am., 2011 WL 830948 (N.D. Ill. Mar. 3, 2011) (letter sent

when borrower was in foreclosure is not a qualified written request because servicer

is no longer “receiving any scheduled periodic payments)”); Moore v. Fed. Deposit

Ins. Corp., 2009 WL 4405538 (N.D. Ill. Nov. 30, 2009) (borrower inquiry seeking

information about amounts claimed as due on a mortgage account is not related to

servicing). See also NCLC Foreclosures, § 9.2.2.2.3.1 (4th ed. and 2013 Supp.). 28 Reg. X, 12 C.F.R. § 1024.38 (effective Jan. 10, 2014).

8

Although the final 2013 RESPA Servicing Rule focuses only on a

servicer’s duty to follow standard loss mitigation procedures and does

not compel a servicer to offer loan modifications or any particular loss

mitigation option, it does establish loss mitigation activities as a

standard servicer duty.29 In addition, Congress has specifically stated

that the loan modification analysis required by the HAMP program is

the standard of the residential mortgage servicing industry under both

federal and state law.30 As the CFPB correctly noted, “any error

related to the servicing of a borrower’s mortgage loan also relates to

standard servicer duties.”31 It would thus seem appropriate for a notice

of error to be used by a borrower to seek correction of a servicer’s

improper denial of a loan modification application by asserting, for

example, that the servicer failed to follow HAMP or GSE guidelines, or

erroneously applied the net present value test.

In discussing its reasoning for not including a servicer’s failure to

correctly evaluate a borrower for a loss mitigation option as a specific

covered error in section 1024.35(b), the CFPB stated that the “appeals

process set forth in § 1024.41(h) provides an effective procedural

means for borrowers to address issues relating to a servicer’s

evaluation of a borrower for a loan modification program.”32

Significantly, though, the CFPB went on to state in this same

discussion that it was adding the catch-all provision to the error

resolution procedure under section 1024.35(b) so as “to encompass the

myriad and diverse types of errors that borrowers may encounter with

respect to their mortgage loans.”33 In doing so, the CFPB did not

foreclose arguments that a notice of error for a servicer’s failure to

29 See Reg. X, 12 C.F.R. § 1024.41 (effective Jan. 10, 2014) (loss mitigation

procedures); NCLC Foreclosures, § 9.2.8 (4th ed. and 2013 Supp.). See also

CWCapital Asset Mgmt., L.L.C. v. Chicago Properties, L.L.C., 610 F.3d 497, 500 (7th

Cir. 2010) (describing common duties of a servicer of loans in a securitized trust,

including “modifying the mortgage to make its terms less onerous to the borrower”). 30 See Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22, 123 Stat.

1632 (2009) (“The qualified loss mitigation plan guidelines issued by the Secretary of

the Treasury under the Emergency Economic Stabilization Act of 2008 shall

constitute standard industry practice for purposes of all Federal and State laws”). 31 See Section-by-Section Analysis, § 1024.35(b)(11), 78 Fed. Reg. 10,744 (Feb. 14,

2013). 32 See Section-by-Section Analysis, § 1024.35(b)(11), 78 Fed. Reg. 10,744 (Feb. 14,

2013). 33 Id.

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correctly evaluate a borrower for a loss mitigation option may be

proper. Such a notice of error may be particularly appropriate when

the “procedural means” for seeking redress under the appeal process

are ineffective or inapplicable.

It is also significant that while the CFPB did not include loss

mitigation evaluation as a covered error, it also did not exclude it or

indicate that it was a “noncovered error.” Although section 1024.35

includes express exclusions and limitations on the use of error notices

as discussed above, nothing in section 1024.35 or its commentary

prohibits a borrower from asserting an error under the catch-all

provision in section 1024.35(b)(11) based on a servicer’s failure to

correctly evaluate a loss mitigation application. In fact, RESPA itself

requires servicers, through amendments made by the Dodd-Frank Act,

to take timely action to correct errors relating to “avoiding foreclosure,”

suggesting that borrowers should be able to assert under RESPA

errors related to loss mitigation.34

Duplicative and Overbroad Notice of Error

The pre-January 10, 2014 version of Regulation X did not include

an exclusion from compliance for a dispute notice sent as a qualified

written request that was duplicative or overbroad. The 2013

amendments to Regulation X change this by permitting a servicer to

reject certain error notices. A servicer is not required to comply with

the response requirements if the servicer reasonably determines that

the asserted error is substantially the same as an error previously

asserted by the borrower for which the servicer has previously

complied, unless the borrower provides new and material information

to support the asserted error.35 New and material information means

information the servicer did not previously review in connection with

investigating a prior notice and is reasonably likely to change the

servicer’s prior determination about the error. A dispute over whether

information was previously reviewed by a servicer or whether a

servicer properly determined that information reviewed was not

34 12 U.S.C. § 2605(k)(1)(C). 35 Reg. X, 12 C.F.R. § 1024.35(g)(1)(i) (effective Jan. 10, 2014).

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material to its prior determination does not itself constitute new and

material information.36

A servicer may also refuse to comply with an overbroad notice of

error. A notice of error is overbroad if the servicer cannot reasonably

determine from the notice the specific error that the borrower asserts

has occurred on the account.37 A servicer is nevertheless required to

comply with an otherwise overbroad notice of error to the extent that

the servicer reasonably identifies some valid assertion of an error

within the notice.38 The Official Interpretations provide the following

examples of an overbroad notice of error:

Assertions of errors regarding substantially all aspects of a

mortgage loan, including errors relating to all aspects of

mortgage origination, mortgage servicing, and foreclosure,

as well as errors relating to the crediting of substantially

every borrower payment and escrow account transaction;

Assertions of errors in the form of a judicial action

complaint, subpoena, or discovery request that purports to

require servicers to respond to each numbered paragraph;

and

Assertions of errors in a form that is not reasonably

understandable or is included with voluminous tangential

discussion or requests for information, such that a servicer

cannot reasonably identify from the notice of error any

error for which § 1024.35 requires a response.39

The exclusion for duplicative or overbroad error notices appears

intended by the CFPB as a response to servicer complaints about

boilerplate qualified written requests available on the internet that

have been used by pro se homeowners and some attorneys in

foreclosure litigation.40 These forms often contain numbered

36 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(g)(1)(i)-1 (effective

Jan. 10, 2014). 37 Reg. X, 12 C.F.R. § 1024.35(g)(1)(ii) (effective Jan. 10, 2014). 38 Id. 39 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(g)(1)(ii)-1 (effective

Jan. 10, 2014). 40 See Section-by-Section Analysis, § 1024.36(f)(1)(iv), 78 Fed. Reg. 10,760 (Feb. 14,

2013) (“During the Small Business Review Panel outreach, small entity

11

paragraphs that resemble discovery requests and have numerous

assertions that may not be relevant to the homeowner’s dispute. To

avoid any potential servicer defense in litigation over violations of

RESPA section 2605(e) and Regulation X section 1024.35, an attorney

who drafts a notice of error should ensure that it is concise and tailored

to the facts of the particular case.

If the servicer determines that a notice of error is duplicative or

overbroad, the servicer must notify the borrower in writing within five

business days after making its determination.41 The notice must set

forth the basis for the servicer’s determination. The failure to provide

such notice to the borrower should preclude a servicer from having a

defense to liability for noncompliance in subsequent litigation based on

an argument that the requirements were not applicable.

Compliance with Notices of Error

The final 2013 RESPA Servicing Rule makes the dispute rights

under RESPA more effective by shortening the response periods. The

servicer must acknowledge receipt of a notice of error within five days

(excluding holidays, Saturdays, and Sundays) after receiving the

notice, rather than the twenty business day period under the former

law.42 Alternatively, the servicer need not provide this

acknowledgment or otherwise satisfy the compliance requirements if it

corrects the error or errors asserted by the borrower, and notifies the

borrower in writing of the correction, within the five business day

period.43

Except for certain notices of error that have different response

periods as discussed below, a servicer must respond to a notice of error

from the borrower within thirty days (excluding holidays, Saturdays,

and Sundays) after receiving the notice.44 This is significantly shorter

representatives expressed that typically qualified written requests received from

borrowers were vague forms found online or forms used by advocates as a form of

pre-litigation discovery.”). 41 Reg. X, 12 C.F.R. § 1024.35(g)(2) (effective Jan. 10, 2014). 42 Reg. X, 12 C.F.R. §§ 1024.35(d) (effective Jan. 10, 2014). 43 Reg. X, 12 C.F.R. §§ 1024.35(f) (effective Jan. 10, 2014). 44 Reg. X, 12 C.F.R. §§ 1024.35(e)(3) (effective Jan. 10, 2014).

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than the prior sixty business day response period. A servicer

adequately responds by taking action to either:

Correct the error or errors asserted by the borrower and

provide the borrower with a written notification of the

correction, the effective date of the correction, and contact

information, including a telephone number, for further

assistance; or

Conduct a reasonable investigation and provide the

borrower with a written notification that includes a

statement that the servicer has determined that no error

occurred, a statement of the reason or reasons for this

determination, a statement of the borrower’s right to

request documents relied upon by the servicer in reaching

its determination, information regarding how the

borrower can request such documents, and contact

information, including a telephone number, for further

assistance.45

Additionally, if during a reasonable investigation of a notice of

error, a servicer determines that there were errors other than or in

addition to the error asserted by the borrower, the servicer must

correct these additional errors and provide the borrower with a written

notification that describes the errors, the action taken to correct the

errors, the effective date of the correction, and contact information,

including a telephone number, for further assistance.46 A servicer may

provide the response for different or additional errors it identifies in

the same notice that responds to errors asserted by the borrower or in

a separate response that addresses these different or additional

errors.47

Shorter Time Deadlines for Certain Notices of Error

Different time limitations apply to certain notices of error. If the

borrower sends a notice of error under section 1024.35(b)(6) asserting

45 Reg. X, 12 C.F.R. §§ 1024.35(e)(1) (effective Jan. 10, 2014). 46 Reg. X, 12 C.F.R. § 1024.36(e)(1)(ii) (effective Jan. 10, 2014). 47 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(e)(1)(ii)-1 (effective

Jan. 10, 2014).

13

that the servicer has failed to provide an accurate loan payoff balance

following a request made under Regulation Z section 1026.36(c)(3),48

the servicer must respond within seven days (excluding holidays,

Saturdays, and Sundays) after receiving the notice.49

For a notice of error asserting certain violations of the Regulation X

loss mitigation procedures, either under section 1024.35(b)(9) that the

servicer initiated a foreclosure before the 120th day of delinquency in

violation of section 1024.41 (f) or (j), or under section 1024.35 (b)(10)

that the servicer moved for foreclosure judgment or conducted a

foreclosure sale in violation of section 1024.41(g) or (j),50 the servicer

must respond prior to the date of a foreclosure sale or within thirty

days (excluding holidays, Saturdays, and Sundays), whichever is

earlier, after the servicer receives the notice of error.51 However, a

servicer is not required to comply with such an error notice if the

servicer receives it seven or less days before a scheduled foreclosure

sale.52 In this situation a servicer shall make a good faith attempt to

respond to the borrower, orally or in writing, and either correct the

error or state the reason it believes no error has occurred.53

Extension of Response Period

A servicer may extend the thirty-day time period for responding to

an notice of error by an additional fifteen days (excluding legal public

holidays, Saturdays, and Sundays) if, before the end of the thirty-day

period, the servicer notifies the borrower in writing of the extension

and the reasons for the extension.54 Although the borrower notification

must state the reasons for the extension, RESPA and Regulation X do

not require that the servicer have a valid or justifiable reason for

extending the time period.

48 See NCLC Foreclosures, § 9.6.5 (4th ed. and 2013 Supp.) and NCLC eReports, Nov.

2013, No. 4. 49 Reg. X, 12 C.F.R. §§ 1024.35(e)(3)(i)(A) (effective Jan. 10, 2014). 50 See NCLC Foreclosures, § 9.2.8.7 (4th ed. and 2013 Supp.) . The loss mitigation

rule will be covered in a future eReports article. 51 Reg. X, 12 C.F.R. § 1024.35(e)(3)(i)(B) (effective Jan. 10, 2014). 52 Reg. X, 12 C.F.R. § 1024.35(f)(2) (effective Jan. 10, 2014). 53 Id. 54 12 U.S.C. 12 C.F.R. § 2605(e)(4); Reg. X, § 1024.35(e)(3)(ii) (effective Jan. 10, 2014).

14

However, a servicer’s right to a fifteen-day extension does not apply

to all notices of error. A servicer may not extend the seven-day time

period for responding to a notice of error under section 1024.35(b)(6)

asserting that the servicer failed to provide an accurate loan payoff

balance.55 Similarly, no extension of time for compliance is permitted

for a notice of error under either section 1024.35(b)(9) or (b)(10)

asserting violations of the applicable loss mitigation procedures.56 If a

servicer cannot comply by the earlier of the foreclosure sale or thirty

days after receipt of the notice of error, it may cancel or postpone a

foreclosure sale.57 A servicer in this situation would comply with the

time limit by responding before the earlier of the date of the

rescheduled foreclosure sale or thirty business days after receipt of the

notice of error.

If the borrower sends a notice of error that asserts multiple errors,

the CFPB’s Official Bureau Interpretation advises that the servicer

may respond through either a single response or separate responses

that address each error.58 It may also treat such a notice of error as

separate notices of error and may extend the time period for

responding to each asserted error for which an extension is

permissible.59

Borrower Right to Request Documentation Supporting

Response

Regulation X imposes several additional requirements upon

servicers in responding to a notice of error. If the borrower requests

copies of documents and information relied upon by the servicer in

making a determination that no error occurred, a servicer shall provide

to the borrower, at no charge, the documents and information within

fifteen business days of receiving the borrower’s request for such

55 Id. 56 Id. 57 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(e)(3)(i)(B)-1 (effective

Jan. 10, 2014). 58 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(e)(1)(i)-1 (effective

Jan. 10, 2014). 59 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(e)(3)(ii)-1 (effective

Jan. 10, 2014).

15

documents.60 Only those documents actually relied upon by the

servicer in finding that no error occurred are required to be produced.

This may include documents reflecting information entered in a

servicer’s collection system, such as a copy of a screen shot of the

servicer’s system showing amounts credited to the borrower’s loan if

the asserted error involves payment allocation.61

A servicer is not required to provide documents relied upon that it

determines contain confidential, proprietary, or privileged information.

If a servicer withholds documents on this basis, the servicer must

notify the borrower of its determination in writing within fifteen

business days of receipt of the borrower’s request for such documents.62

Regulation X permits a servicer to request that the borrower

provide supporting documentation in connection with the investigation

of an asserted error. However, a servicer may not (1) require a

borrower to provide such information as a condition of investigating an

error; or (2) determine that no error occurred because the borrower

failed to provide any requested information without conducting a

reasonable investigation.63

Ban on Charging Response Fees

The Dodd-Frank Act clarifies that a servicer shall not charge a fee

for responding to a “valid qualified written request.”64 This provision is

implemented by Regulation X section 1024.35(h) for notices of error

and section 1024.36(g) for requests for information.65 A servicer is

prohibited from charging a fee as a condition of responding to a notice

of error or request for information.

The final 2013 RESPA Servicing Rule also clarifies that a servicer

shall not require a borrower to make any payment that may be owed

on a borrower’s account as a condition of responding to a notice of

60 Reg. X, 12 C.F.R. § 1024.36(e)(4) (effective Jan. 10, 2014). 61 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(e)(4)-1 (effective Jan.

10, 2014). 62 Id. 63 Reg. X, 12 C.F.R. § 1024.36(e)(2) (effective Jan. 10, 2014). 64 Pub. L. No. 111-203, 124 Stat. 1376, tit. XIV, § 1463(a) (July 21, 2010). 65 Reg. X, 12 C.F.R. § 1024.35(h) and § 1024.36(g) (effective Jan. 10, 2014).

16

error.66 The Official Interpretations instruct that this borrower

protection does not alter the borrower’s obligation to make payments

owed under the terms of the mortgage loan.67 For example, if a

borrower sends a notice of error asserting that the servicer failed to

accept the borrower’s monthly payment made in February, the

borrower is still obligated to make the March monthly payment.

However, the servicer may not require that a borrower make the

March payment as a condition for complying with its obligations under

section 1024.35 with respect to the notice of error on the February

payment.

66 Reg. X, 12 C.F.R. § 1024.35(h) (effective Jan. 10, 2014). 67 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(h)-1 (effective Jan.

10, 2014).

17

Summaries of Recent Cases

Unpublished & Trial Court Decisions68

Promissory Estoppel

Haroutunian v. GMAC Mortg., LLC., 2013 WL 6687158 (Cal. Ct.

App. Dec. 19, 2013): Promissory estoppel claims must include: 1) a

promise, 2) reasonably made with the expectation of inducing reliance

by the other party; 3) detrimental reliance; and 4) injustice if the

promise is not enforced. Here, servicer promised to cancel a foreclosure

sale if borrower paid an initial $10,000, followed by five monthly

payments that would bring her mortgage current. Borrower made the

initial and two monthly payments, but the home was foreclosed. The

trial court refused borrower’s motion to amend her complaint to assert

a promissory estoppel claim against her servicer. The Court of Appeal

remanded the case, considering this an abuse of discretion, and

instructed the trial court to allow borrower to add a promissory

estoppel cause of action because her facts stated a valid PE claim.

First, there was a clear and unambiguous promise to cancel the sale in

exchange for money, “paid in accordance with a written payment

schedule to be provided by [servicer].” This was not an “agreement to

agree,” and borrower did not breach the agreement by waiting to make

her first monthly payment until she received the schedule from

servicer (which was after the servicer had scheduled the first

payment). Further, borrower had taken out personal loans to pay the

entire reinstatement amount in a lump sum, but servicer only offered

to cancel the sale if borrower reinstated with installment payments.

Borrower detrimentally relied on servicer’s promise by choosing not to

reinstate in a lump sum, and in making three installment payments.

Servicer should have reasonably expected borrower to rely on its

promise not to foreclose, demonstrated by borrower’s continued

installment payments up to the foreclosure. The statute of frauds

68 Cases without Westlaw citations can found at the end of the newsletter. Please

refer to Cal. Rule of Ct. 8.1115 before citing unpublished decisions.

18

defense argued by servicer is inapplicable to a promissory estoppel

cause of action. Lastly, borrower’s pleadings, if true, show that

injustice can only be avoided if the promise is enforced.

Federal Cases

First Circuit Upholds Dismissal of HAMP-Related Implied

Covenant of Good Faith & Fair Dealing and Negligence Claims

MacKenzie v. Flagstar Bank, FSB, __ F.3d __, 2013 WL 6840611

(1st Cir. Dec. 30, 2013): Breach of implied covenant of good faith and

fair dealing claims require borrowers to show their servicer unfairly

interfered with the borrower’s right to see a contract fully performed.

Here, servicer offered borrowers a HAMP modification but rescinded

that offer (after what appears to be borrowers’ rejection) just six days

later. Two contracts gave rise to possible (but ultimately unsuccessful)

fair dealing claims. First, borrowers argued that as a third party

beneficiary to the Servicer Participation Agreement (SPA) between

their servicer and the Treasury Department (part of the HAMP

program) they could assert a valid fair dealing claim. The First Circuit,

however, reaffirmed the widely held reasoning that private borrowers

are not third party beneficiaries to SPA agreements. They are rather

“incidental” beneficiaries of the HAMP program, and cannot bring

contract-related causes of action using those agreements. Second,

borrowers staked their fair dealing claim on their mortgage agreement,

arguing that their servicer must act “in good faith” and “use reasonable

diligence to protect the interests of the mortgagor.” But because

nothing in the mortgage contract required the servicer to modify the

loan, or even to consider a modification, servicer’s failure to extend a

modification did not breach the implied covenant. The court upheld the

dismissal of borrower’s breach claim pertaining to both contracts.

As in California, Massachusetts borrowers must allege they were owed

a duty of care by their servicer to bring a claim for negligence, and a

normal borrower-lender relationship does not give rise to a duty. No

duty was owed under the SPA agreement –to which borrowers are not

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third party beneficiaries— or under HAMP itself. Nor can statutory

causes of action provide the basis for a negligence claim absent an

independent duty of care. Further, HAMP violations do not provide

grounds for negligence per se. Borrowers were unable to establish a

duty of care and the court upheld the dismissal of their negligence

claim.

Tender Not Required When Sale Would be Void

Aniel v. Aurora Loan Servs., LLC, __ F. App’x __, 2013 WL 6671549

(9th Cir. Dec. 19, 2013): California law requires borrowers bringing

wrongful foreclosure claims to tender the amount due on their loan.

There are several exceptions to this rule, including where the

allegations, if true, would render the foreclosure sale void. Alleging

mere irregularities in the foreclosure sale is not enough to escape

tender. Here, borrowers brought a wrongful foreclosure claim based on

an allegedly fraudulent (forged) substitution of trustee. If true, this

allegation would render the sale void and extinguish the tender

requirement. The district court erred, then, in dismissing borrower’s

claim with prejudice based on borrower’s inability to tender.

Ninth Circuit Definition of “Debt Collector” under the FDCPA

& Who Bears the Burden of Proof

In re Brown, 2013 WL 6511979 (B.A.P. 9th Cir. Dec. 12, 2013): The

FDCPA defines “debt collector” two ways: 1) “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;” 2) or any

person “who regularly collects or attempts to collect, directly or

indirectly, debts owed . . . or due another.” The Ninth Circuit recently

determined that, to be liable under the first definition, a “debt

collector” must have debt collection as the principal purpose of its

business, not merely a principal purpose. Schlegel v. Wells Fargo Bank,

N.A. (In re Schlegel), 720 F.3d 1204 (9th Cir. 2013) (summarized in our

August 2013 newsletter). Plaintiff-debtors bear the burden of proving

this element. Here, the trial bankruptcy court (which decided the case

20

before Schlegel was published) impermissibly shifted the burden of

proof to defendant-servicers, requiring them to show that debt

collection was not the principal purpose of their businesses. The

bankruptcy court granted servicers their summary judgment motion

on other grounds, so this error was “harmless,” but the Ninth Circuit

BAP, in affirming the bankruptcy court’s decision, clarified that

servicers do not have to show they are not “debt collectors” as defined

in Schlegel. Rather, plaintiff-borrowers must affirmatively show that

debt collection is the principal purpose of their servicer’s business (or

at least that servicer’s status as a “debt collector” is a genuine issue of

material fact).

HUD Policy Statement on RESPA’s “Affiliated Business

Arrangement” Exception is Not Binding

Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722 (6th Cir. 2013):

RESPA prohibits settlement-service providers, like real estate agencies

and title insurers, from accepting fees or kickbacks for business

referrals. This prohibition, however, does not apply to “affiliated

business arrangements” (ABAs), as defined by three prerequisites in

the statute. HUD issued a policy statement in 1996, identifying ten

factors the agency should consider in ferreting out sham ABAs. Here,

borrowers alleged their real estate agency impermissibly created a

sham ABA with a title service company that referred business to a

separate title insurance provider. This title insurance provider

performed the bulk of the title work, leaving the sham ABA to conceal

the kickbacks. Borrowers conceded that the ABA met the three

prerequisites outlined in RESPA, but argued it nevertheless violated

RESPA because it did not satisfy the ten HUD-specified factors and

was, therefore, a sham ABA. The Sixth Circuit disagreed, holding that

as long as the business arrangement met the three requirements listed

in RESPA, it qualified as an ABA and escaped RESPA liability. This

ruling effectively held that HUD’s long-standing policy statement was

irrelevant, not entitled to Chevron or Skidmore deference, and not

binding on the court.

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FDCPA vs. Rosenthal: Differing Definitions of “Debt Collector”

& “Debt Collection”

Webb v. Bank of Am., N.A., 2013 WL 6839501 (E.D. Cal. Dec. 23,

2013): The FDCPA defines “debt collector” as: 1) “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;”

2) or any person “who regularly collects or attempts to collect, directly

or indirectly, debts owed . . . or due another.” The Ninth Circuit has

not explicitly determined whether mortgage servicers (or their

transferees) are “debt collectors” under the FDCPA, but this court has

previously discounted that notion because servicers are collecting debt

owed to themselves, not to others. (If a servicer bought the loan while it

was in default, that is an exception to the general rule that servicers

are not “debt collectors.”) This borrower brought an FDCPA claim

against her new servicer, which purchased servicing rights to

borrower’s loan after borrower was granted a permanent modification

and had already begun making modified payments. The new servicer

refused to accept borrower’s modified mortgage payments and

attempted to collect her un-modified amount. The court found the

servicer did not qualify as a “debt collector” under the FDCPA and

dismissed this claim.

The Rosenthal Act’s definition of “debt collector” is much broader: “any

person who, in the ordinary course of business, regularly, on behalf of

himself or herself or others, engages in debt collection.” But to even

reach that inquiry, borrower had to assert that her servicer was

engaged in “debt collection,” which this court had previously

determined did not include foreclosure. The court cited Corvello v.

Wells Fargo Bank, 728 F.3d 878 (9th Cir. 2013) for the proposition that

engaging in a modification agreement (in Corvello, a TPP) and

collecting modified payments can qualify as “debt collection.” This

ruling, and borrower’s allegations that servicer repeatedly demanded

un-modified mortgage payments and did not merely engage in

foreclosure activity, convinced the court that servicer should not

“categorically [be] excluded as a ‘debt collector’ under the Rosenthal

Act.” Under its broad definition, which includes entities collecting their

22

own debts, servicer qualified as a “debt collector” and the court denied

its motion to dismiss borrower’s Rosenthal claim. Borrower’s unlawful

prong UCL claim, based on her Rosenthal claim, also survived.

Fraudulent Substitution of Trustee: Basis for Wrongful

Foreclosure Claim, Tender Excused

Engler v. ReconTrust Co., 2013 WL 6815013 (C.D. Cal. Dec. 20,

2013): California law requires any substitution of a trustee be

recorded, executed and acknowledged by “all of the beneficiaries under

the trust deed or their successors in interest.” CC § 2934(a)(1). Invalid

substitutions render any resulting foreclosure sale void. In this case,

MERS was listed as the beneficiary on borrower’s original note.

Accordingly, MERS –or its authorized agent—should have signed the

substitution of trustee that was recorded the day after the NOD was

recorded. The only signature appearing on the substitution of trustee,

however, belonged to an employee of borrower’s servicer, not an

employee of MERS. The court found these allegations sufficient to

state a valid wrongful foreclosure claim based on noncompliance with

CC 2934(a). No tender was required because these allegations, if true,

would render the foreclosure void.

“Mislabeling” a Cause of Action; Valid Constructive Fraud and

UCL “Unfair” Prong Claims Based on Reverse Mortgage

Origination

Welte v. Wells Fargo Bank, N.A., 2013 WL 6728889 (C.D. Cal. Dec.

18, 2013): Under the federal rules, a complaint should not be dismissed

just because the facts alleged do not match up exactly with the

“particular legal theory” advanced by plaintiff. A court should, if it can,

look at the facts alleged in the complaint and determine if they support

any valid legal theory. Here, borrower brought a negligent

misrepresentation claim against the parties who arranged a reverse

mortgage for her and her (now deceased) husband. In her opposition to

defendants’ motion to dismiss, she stated that this claim was

“mislabeled” and should instead be characterized as a fraud claim. The

23

court agreed that plaintiff was not impermissibly asserting additional

facts in her opposition, but that her complaint alleged sufficient facts

to support a fraud cause of action. The court denied the motion to

dismiss plaintiff’s negligent misrepresentation claim, but instructed

her to change the title of the claim to reflect its true nature: fraud.

To allege constructive fraud, a plaintiff must show: “1) any breach of

duty which, without an actual fraudulent intent, 2) gains an advantage

to the person in fault . . . by misleading another to his prejudice.” Duty

and breach were established at an earlier stage in this litigation, and

the court now found that defendants had gained an advantage by

breaching that duty. In failing to disclose that plaintiff should have

been included as a “borrower” and “owner” in the reverse mortgage

arrangement, and that under the HUD regulation foreclosure was

solely dependent upon the death of her husband, defendants failed to

disclose material facts. Plaintiff’s fraud claim survived.

To state a UCL claim under its “unfair” prong, a plaintiff must show

that defendant’s actions or practices “offends an established public

policy or . . . is immoral, unethical, oppressive, unscrupulous or

substantially injurious to consumers.” Reverse mortgages are insured

by HUD and intended to protect elderly homeowners as they age and

“prevent displacement.” Plaintiff’s “unfair” UCL claim then, survives

the motion to dismiss because failing to treat the homeowner’s spouse

as a homeowner, protected under the reverse mortgage regulation, is

an unfair business practice.69

Glaski-like Claim Rejected; Prejudice Required for Wrongful

Foreclosure and Robo-Signing Claims

Rivac v. NDeX West LLC, 2013 WL 6662762 (N.D. Cal. Dec. 17,

2013): The borrowers in Glaski v. Bank of America (see HBOR

Collaborative’s August and September newsletters) successfully

69 In accordance with Bennett v. Donovan, __ F. Supp. 2d __, 2013 WL 5424708

(D.D.C. Sept. 30, 2013), HUD will likely revise the regulation to conform with

statutory language that prohibits foreclosure until the death of the borrower and the

borrower’s spouse.

24

alleged a wrongful foreclosure claim based on a void assignment of the

deed of trust. Specifically, the owner of the loan attempted to assign it

to a trust after the trust had already closed according to the trust’s own

pooling and servicing agreement (PSA). In this case, borrowers

attempted a slightly different argument: that the owner of their loan

failed to record the loan’s assignment to a trust within the 90 days

specified in that trust’s PSA. Instead, the assignment was recorded

four years later. The court did not address this argument specifically,

but instead recited the oft-repeated reasoning that securitization does

nothing to effect the authority to foreclose. Addressing Glaski, this

court sided with the majority of California courts in rejecting the

notion that borrowers have standing to challenge a PSA to which they

are not a party or a third-party beneficiary.

To bring a wrongful foreclosure claim, many California courts require

borrowers to show prejudice resulting from the fraudulent

foreclosure—not from borrower’s default. So too with robo-signing

claims: “where a [borrower] alleges that a document is void due to

robo-signing, yet does not contest the validity of the underlying debt,

and is not a party to the assignment, the [borrower] does not have

standing to contest the alleged fraudulent transfer.” Here, borrowers’

wrongful foreclosure and robo-signing claims were dismissed, in part,

because they could not allege prejudice unrelated to their own default.

Basically, the court determined that even if there were irregularities in

the foreclosure sale, or in assignments leading up to the sale, the

foreclosure would still have occurred because of borrowers’ default.

Borrowers must show defendants’ wrongful acts—securitization

irregularities, foreclosure notice irregularities, or robo-signing—

directly caused harm to the borrower.

Statutory Immunities from Slander of Title Claims

Patel v. Mortg. Elec. Reg. Sys. Inc., 2013 WL 6512848 (N.D. Cal.

Dec. 12, 2013): To establish a claim for slander of title, a borrower

must show: 1) a publication, 2) without privilege or justification, 3)

that is false, 4) and directly causes immediate pecuniary loss.

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Defendants may assert several statutory immunities to defend against

slander of title claims, including the specific privilege afforded NODs

and NTSs (CC § 2924(d)), that publications were made without malice,

from an interested party, to an interested party (CC § 47(c)), and that

any trustee error was made “in good faith,” relying upon default

related information supplied by the beneficiary (CC § 2924(b)). Here,

borrower alleged trustee’s NOD and NTS were false, unprivileged,

malicious, and reckless publications. The court disagreed: all

assignments and substitutions were allowed by the DOT and properly

recorded, defeating borrower’s claim of recklessness. Further, the NOD

and NTS were recorded because of borrower’s default—which borrower

admitted. Lastly, borrower was unable to show that any error in the

NOD or NTS (not specified) was not the result of good faith reliance on

the undisputed fact that borrower was in default. The court

determined that defendant trustee was therefore immune from slander

of title in multiple ways. The NOD and NTS were privileged

publications and borrower’s slander of title claim was dismissed.

In Rem Relief from Automatic Stay: Application through

Several Bankruptcies and Immunity from Collateral Attack

Miller v. Deutsche Bank Nat’l Tr. Co., 2013 WL 6502498 (N.D. Cal.

Dec. 11, 2013): Filing a bankruptcy petition stays all debt-related

activity against the debtor, including foreclosure activity, until the

case is dismissed or discharged. Creditors may petition the court for

relief from the stay which enables them to continue debt-collection

activities, like foreclosure. Usually, relief from an automatic stay

applies only to a particular bankruptcy case. Bankruptcy courts can,

however, authorize special in rem relief if a creditor can prove that a

debtor filed multiple bankruptcies in a “scheme” to delay or thwart

legitimate efforts to foreclose on real property. 11 U.S.C. § 362(d)(4).

This relief is binding (as applied to the particular real property in

question) on any other bankruptcy within two years after relief is

granted. In other words, the in rem relief from the automatic stay

sticks to the property, and applies to any bankruptcy involving that

property, regardless of petitioner. Here, borrower brought an action

26

against her servicer for wrongful foreclosure and eviction in violation

of the automatic stay pertaining to her bankruptcy case. A bankruptcy

court had issued in rem relief applied to the property in an earlier

bankruptcy case, however, filed by a different debtor. Borrower

claimed that the debtor in the prior bankruptcy case giving rise to the

§ 362(d)(4) order had no true interest in the property, effectively

challenging the bankruptcy court’s factual findings that gave rise to its

in rem order. The district court determined that borrower should have

objected to the in rem order during that first bankruptcy case (though

she was not the debtor in that case) and cannot now collaterally attack

a final order of a bankruptcy court. Further, that in rem order is

“effective as to anyone holding any interest in the property, whether or

not they are in privity with the debtor.” The court granted servicer’s

motion to dismiss.

Delayed Discovery Doctrine Does Not Apply to RESPA Claims

Cheung v. Wells Fargo Bank, N.A., 2013 WL 6443116 (N.D. Cal.

Dec. 9, 2013): RESPA claims under 12 U.S.C. § 2605 (dealing with

mortgage servicing and escrow accounts) must be brought within three

years from the alleged violation. Under California’s delayed discovery

doctrine, SOL clocks can toll until the plaintiff discovered (or had

reasonable opportunity to discover) the misconduct. Here, borrowers

attempted to toll the three-year RESPA SOL by pleading they could

not determine when their servicer's wrongful acts occurred, or exactly

what those acts were, without the benefit of the discovery stage of

litigation. The court disagreed on two grounds: 1) the delayed discovery

doctrine pertains only to borrower’s personal discovery of the wrongful

conduct and is unrelated to borrower’s opportunity to conduct

discovery; and 2) the doctrine does not apply to RESPA claims, at least

in the Ninth Circuit. Broadly, the doctrine does not apply “to claims

made pursuant to a statute that defines when the claim accrues rather

than defining a limitations period from the date of accrual” (emphasis

original). Because REPSA states that a § 2605 claim may be brought

within three years “from the date of the occurrence of the violation,”

this type of claim is impervious to the delayed discovery doctrine.

27

Diversity Jurisdiction Analysis: Wells Fargo is a “Citizen” of

South Dakota; HOLA Preempts HBOR, Not Common Law

Claims; When Servicers Owe Borrowers a Duty of Care

Meyer v. Wells Fargo Bank, N.A., 2013 WL 6407516 (N.D. Cal. Dec.

6, 2013): A defendant may remove a state action to federal court if the

federal court exercises subject matter jurisdiction (SMJ) over the

matter. Federal courts can exercise SMJ in two ways: 1) over a federal

claim; or 2) over a state claim arising between citizens of diverse

(different) states. If it appears, at any time before final judgment, that

the federal court lacks SMJ, that court must remand the case to state

court. This California borrower argued that the case, consisting

entirely of state claims, should be remanded because Wells Fargo’s

California citizenship destroyed diversity jurisdiction. Unlike the court

in Vargas (below), this court found Wells Fargo to be solely a citizen of

South Dakota, its state of incorporation and the state listed as housing

the company’s “main office” in its articles of association. That Wells

Fargo’s “principal place of business” is in California does not render

Wells Fargo a “citizen” of California. The court denied borrower’s

motion to remand.

State laws regulating or affecting the “processing, origination,

servicing, sale or purchase of . . . mortgages” are preempted by the

Home Owner’s Loan Act (HOLA), as applied to federal savings

associations. Without independent analysis, this court accepted the

reasoning of the majority of California federal courts that Wells Fargo,

a national bank, can invoke HOLA preemption to defend its conduct as

a national bank because the loan in question originated with a federal

savings association. The court then found borrower’s HBOR claims

(pre-NOD outreach, dual tracking and SPOC) preempted because these

laws relate to the processing and servicing of mortgages. Borrower’s

fraud, promissory estoppel, negligence, negligent misrepresentation,

and UCL claims were not preempted. These common laws “[hold

banks] responsible for the statements they make to their borrowers”

and impose a “general duty not to misrepresent material facts when

doing business with borrowers.” Borrowers’ common law claims were

based on the allegation that her servicer falsely promised to halt

28

foreclosure while her modification application was pending, and were

accordingly not preempted.

To state a claim for negligence, a borrower must show that her servicer

owed her a duty of care. This court allowed that a duty can arise when

“a financial institution . . . offers borrowers a loan modification and a

trial period plan.” Here, however, there was never a trial or permanent

modification. The “mere engaging in the loan modification process is a

traditional money lending activity” (emphasis original) and does not

give rise to a duty. Borrower’s negligence claim was dismissed.

Diversity Jurisdiction Analysis: Wells Fargo is a “Citizen” of

California

Vargas v. Wells Fargo Bank, N.A., __ F. Supp. 2d __, 2013 WL

6235575 (N.D. Cal. Dec. 2, 2013): A defendant may remove a state

action to federal court if the federal court exercises subject matter

jurisdiction (SMJ) over the matter. Federal courts can exercise SMJ in

two ways: 1) over a federal claim; or 2) over a state claim arising

between citizens of diverse (different) states. If it appears, at any time

before final judgment, that the federal court lacks SMJ, that court

must remand the case to state court. Here, two California borrowers

sued Wells Fargo in state court, asserting only state claims. Wells

removed the action on the basis of diversity jurisdiction, claiming

exclusive South Dakota citizenship based on its incorporation in that

state. The federal district court rejected this argument, emphasizing

the congressional goal of achieving jurisdictional parity between

national and state banks. Accordingly, the court determined that

national banks are citizens of both their state of incorporation and the

state where the bank maintains its principal place of business.

Because Wells Fargo maintains its principal place of business in

California, it was considered a “citizen” of California, destroying

diversity with the California borrowers. The case was remanded.

29

Proposed Class Action Survives MTD on “Unfair” &

“Fraudulent” UCL Prongs

Bias v. Wells Fargo Bank, N.A., 942 F. Supp. 2d 915 (N.D. Cal.

2013): To have UCL standing, borrowers must allege economic injury

directly caused by the unfair business practice. Broadly, this proposed

class accuses Wells Fargo of using subsidiaries to impose marked-up

fees (“Broker’s Price Opinions” (BPOs) and appraisals) on defaulting

borrowers and unfairly profiting from that arrangement. Using

California’s UCL statute, borrowers alleged Wells concealed this

arrangement, did not provide borrowers with true itemizations of the

fees or “services,” and allowed borrowers to believe they needed to pay

Wells for these services, even though their mortgage agreements said

nothing about these costs. Wells argued that because the fees were

within market rate, borrowers cannot show economic injury. The court

disagreed: even if the BPOs were within the market rate, borrowers

allege they still paid Wells Fargo more than they would have if Wells

had only passed on actual costs, not the marked-up costs incurred by

contracting the work to Wells Fargo subsidiaries. Borrowers

successfully alleged UCL standing because their economic injury was

directly caused by Wells Fargo’s actions.

After establishing that prospective plaintiffs have standing, the court

then considered two UCL prongs. “Unfair” practices can include

activity that controverts a public policy, is “immoral, unethical,

oppressive, unscrupulous, or substantially injurious to consumers,” or

that results in substantial consumer injury, not outweighed by

consumer benefits and not reasonably avoided. This court found

borrower’s allegations to fulfill the second category: these fees are

sufficiently characterized as immoral, unethical and oppressive. Also,

under the third definition, it is not certain (at this stage) that the

benefits of BPOs and appraisals outweigh the harm to borrowers in

racking up fees that plunged them further and further into default.

Borrowers’ “unfair” UCL claim survived the MTD.

Finally, the court considered borrowers’ “fraudulent” UCL claim. This

requires a showing that members of the public are likely to be deceived

30

by defendant’s actions. Here, borrowers’ claim is one of fraud by

omission, which must be pled with particularity. Borrowers

successfully alleged “numerous instances where the omitted

information could have been revealed – namely, in the mortgage

agreements themselves, in the mortgage statements . . . or during

communications with Wells Fargo where it told [borrowers] that the

fees were in accordance with their mortgage agreements.” These

allegations were particular enough for borrowers’ fraudulent prong

UCL claim to survive. (Borrowers’ fraud claim also survived based on

similar reasoning.)

A National Bank Cannot Invoke HOLA Preemption to Defend

its Own Conduct

Winterbower v. Wells Fargo Bank, N.A., No. SA CV 13-0360-DOC-

DFMx (C.D. Cal. Dec. 9, 2013):70 State laws may be preempted by

federal banking laws such as the Home Owner’s Loan Act (HOLA) and

the National Banking Act (NBA). HOLA regulates federal savings

associations and the NBA, national banks. Here, Wells Fargo argued

HBOR’s dual tracking statute (CC § 2923.6) is preempted by HOLA.

Normally, Wells Fargo would be prevented from invoking HOLA

because it is a national bank. Wells Fargo argued, however, that

because the loan in question originated with World Savings, a federal

savings association, HOLA preemption survived Wells Fargo’s

ultimate purchase of the loan through merger. The HBOR

Collaborative submitted an amicus brief and reply in this case, arguing

on behalf of borrowers that Wells Fargo cannot use HOLA to defend its

own conduct as a national bank. Reversing his previous position and

rulings on this issue, Judge Carter agreed with the Collaborative that

preemption cannot be purchased or assigned. Rather, courts should

“look to see whether the alleged violations took place when the banking

entity was covered by HOLA.” If Wells Fargo had to defend World

Savings’ origination conduct, for example, HOLA preemption would be

70 This summary is based on the court’s unadopted tentative ruling on a motion to

dismiss. Plaintiffs moved to voluntarily dismiss their action before the court could

officially rule on this issue. The tentative is attached to the end of this newsletter.

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appropriate because World Savings was regulated by HOLA when the

conduct being litigated occurred. Here, however, Wells Fargo was

defending its own dual tracking conduct, which occurred long after

Wells Fargo obtained the loan. The court accordingly prevented Wells

Fargo from invoking HOLA to defend its own conduct. The court also

acknowledged that precedent that has allowed national banks to use

HOLA preemption has been incorrectly decided.

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Recent Regulatory Updates

IRS Letter to Barbara Boxer RE: Cancellation of Debt Income

(CODI) and CCP 580e Short Sales (Sept. 19, 2013)71

Cal. Code Civ. Proc. § 580e prevents lenders from collecting a

deficiency from a borrower who short sells his home in a lender-

approved sale for less than what he owes on his mortgage. Previously,

the IRS had followed Rev. Rul. 90-16, stating that these borrowers

needed to report the deficiency as CODI. With this letter, the IRS has

now determined that California borrowers protected by § 580e’s anti-

deficiency provisions essentially have “nonrecourse loans,” for tax

purposes, and need not report a deficiency resulting from a short sale

as CODI. They should report the short sale, however, “as an amount

realized on the sale of the property.”

SB 426: Additional Deficiency Protections for California

Borrowers

Senate Bill 426 amended CCP §§ 580b & 580d. Previously, these

statutes prohibited creditors from collecting post-foreclosure deficiency

judgments against borrowers. Many creditors, though, would continue

post-foreclosure collection efforts because the existing laws only

prohibited deficiency judgments. SB 426 amended the law to prevent

both deficiency judgments and collection efforts and clarified that a

deficiency is not owed after foreclosure. It also prohibits creditors from

reporting post-foreclosure deficiencies as debts to credit reporting

agencies.

71 Letter is attached.

33

Fannie Mae Servicing Guide Announcement SVC-2013-27,

Force-Placed Insurance Requirements (Dec. 18, 2013) (effective

June 1, 2014)

Fannie Mae has revised its servicing requirements for force-placed

insurance. The change applies to all new or renewed force-placed

insurance policies on properties secured by Fannie Mae mortgages.

Effective June 1, 2014, force-placed premiums may not include any

insurance commissions or payments to the servicer, its employees, or

affiliates. Servicers are also prohibited from obtaining force-placed

insurance from entities affiliated with the servicer, specifically captive

insurance and reinsurance arrangements. Servicers will be required to

sign a “lender-placed insurance servicer certification,” asserting

compliance with these new requirements.

Fannie Mae Servicing Guide Announcement SVC-2013-28,

Standard Modification and Streamlined Modification (Dec. 19,

2013) (effective April 1, 2014)

Loans available for Fannie Mae modification programs (standard and

streamlined) now include loans “with a pre-modified mark-to-market

loan-to-value (MTMLTV) ratio less than 80%.” This calculation

consists of the gross unpaid principal balance divided by the current

property value. This expands the number of loans available for Fannie

Mae modification programs. This same expansion applies to Freddie

Mac loans (see explanation below).

Fannie Mae Servicing Guide Announcement SVC-2013-29,

Servicing Transfers (Dec. 19, 2013) (effective Mar. 1, 2014)

Servicing transfers have always required Fannie Mae’s approval. This

announcement makes clear that, effective March 1, 2014, Fannie Mae’s

prior written consent must be obtained for all subservicing transfers,

whether from the master servicer to a subservicer, between

subservicers, or from the subservicer back to the master servicer.

Fannie Mae’s transfer of servicing form, Form 629, now requires

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identification of any subservicers involved in a transfer. Fannie Mae

will review the capacity and performance of any designated

subservicer.

Freddie Mac Bulletin 2013-27, Deficiencies, Modifications, Non-

Mod Foreclosure Alternatives & Force-Placed Insurance (Dec.

18, 2013) (varying effective dates)

Default Judgments & Deficiencies

To expedite default judgments, servicers may obtain judgments

against borrowers for less than the amount owed on the loan. Servicers

are now prevented, however, from agreeing to default judgments for

less than the market value of the property. Also, effective immediately,

servicers must cooperate with Freddie Mac to collect deficiencies.

Loan modifications

Servicers may not include any waivers in modification agreements,

requiring borrowers to waive any of their legal rights as a condition of

the agreement. This language is framed as a clarification of existing

guidance and may be helpful in attacking waiver provisions inserted

into mortgage modifications.

Effective April 1, 2014, borrowers with equity in their homes may now

be eligible for modifications. Borrowers whose current loan-to-value

ratio (using the actual current market value of the property) is less

than 80%, must be offered Trial Plans based on a 480-month

amortization schedule, where that payment is less than or equal to the

current principal and interest payment; and based on a 360-month

amortization schedule, where that results in a reduction in the current

principal and interest payment of at least 20%. Borrowers who ask for

a shorter amortization period may be offered one, provided certain

conditions are met.

Servicers granting modifications to borrowers with homes damaged or

destroyed by an “Eligible Disaster” (defined on a case-by-case basis)

must, effective February 1, 2014, convert any adjustable rate mortgage

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it modifies to a fixed interest rate mortgage (unless objected to by the

borrower).

Non-Mod Foreclosure Alternatives

Servicers are granted increased discretion in offering special

forbearances to borrowers with homes damaged or destroyed in an

Eligible Disaster (defined on a case-by-case basis).

Effective February 1, 2014, a borrower’s contribution toward a short

sale or a deed-in-lieu can take the form of cash or a promissory note.

Servicers must evaluate borrowers more than 31 days delinquent in

two ways, to assess borrower’s ability to repay: 1) what are the

borrower’s cash reserves? and 2) what is the borrower’s ability to make

payments based on a promissory note?

Force-placed insurance

The changes to force-placed insurance are promulgated under a

directive from the Federal Housing Finance Agency (FHFA) and track

Fannie Mae’s changes (above). Effective June 1, 2014, servicers, their

employees, agents, brokers, or anyone else affiliated with the servicer,

cannot receive any compensation from an insurer in connection with

force-placed insurance. Further, servicers cannot use an affiliate to

place or reinsure force-placed insurance.

36

The HBOR Collaborative presents:

New Two-Part Webinar Series on CFPB Mortgage

Servicing Rules

Thursday, January 16

12:00 PM - 1:30 PM PST

New CFPB Mortgage Servicing

Rules Part 1: Error Resolution;

Force Placed Insurance; Periodic

Statements, Other Servicer

Duties

(1.5 hours of MCLE credit)

Space is limited.

Reserve your Webinar seat now for Part 1

at:

https://www1.gotomeeting.com/register/649

193728

Part 1 of the webinar will cover the privately

enforceable mortgage servicing regulations

under RESPA and TILA that go into effect

on January 10, 2014.

Learn how the qualified written request

procedure under RESPA has been completely

changed. Part 1 will also cover new regulations

on force-placed insurance, requests for identity

of mortgage owner, mortgage payment

application, payoff statements, payment change

notices, and periodic mortgage statements.

Thursday, January 23

12:00 PM - 1:30 PM PST

New CFPB Mortgage Servicing

Rules Part 2: Loss Mitigation

Procedures

(1.5 hours of MCLE credit)

Space is limited.

Reserve your Webinar seat now for Part 2

at:

https://www1.gotomeeting.com/register/637

117752

Part 2 of the webinar will cover the privately

enforceable mortgage servicing regulations

under RESPA that go into effect on January 10,

2014.

This session will focus on the Regulation X

provisions dealing with early intervention,

continuity of contact, and loss mitigation

procedures (including dual tracking).

After registering you will receive a confirmation email containing information about joining

the Webinar.

37

Presenter: John Rao, staff attorney, National Consumer Law Center

San Francisco-based housing advocacy center, the National Housing Law Project (NHLP), and its

project partners, Western Center on Law & Poverty, the National Consumer Law Center, and

Tenants Together (the HBOR Collaborative) announce they are offering free assistance to

California attorneys in implementing the state’s new Homeowner Bill of Rights (HBOR). The HBOR

Collaborative’s free services for consumer attorneys statewide include education, advocacy,

technical assistance, litigation support, a listserv for attorneys, and extensive web-based attorney

resources. The Collaborative is also providing internet webinars and live trainings in areas

throughout California. To learn more about California HBOR and to register for this and all

upcoming trainings, consumer attorneys should go to http://calhbor.org/. Consumer attorneys with

specific questions can contact HBOR collaborative staff through our website,

http://calhbor.org/.

Each webinar will qualify for 1.5 hours of MCLE through National Housing Law Project.

For more information email Jessica Hiemenz at Jhiemenz@nclc.org

System Requirements

PC-based attendees

Required: Windows® 8, 7, Vista, XP or 2003 Server

The HBOR Collaborative and its services, including this free webinar training for

attorneys, are funded by a grant from the Office of the Attorney General of California

from the National Mortgage Settlement to assist California consumers.

38

SAVE THE DATE! TUESDAY FEBRUARY 25, 2014

The HBOR Collaborative presents:

REPRESENTING HOMEOWNERS & TENANTS UNDER THE HOMEOWNER BILL OF RIGHTS

This free training will be held at:

THE UNITARIAN UNIVERSALIST CHURCH OF FRESNO 2672 E. Alluvial Avenue, Fresno, CA

The HBOR Collaborative presents a free all-day training on the nuts and bolts of representing tenants and homeowners under California’s Homeowner Bill of Rights (HBOR). The training will cover HBOR basics and provide practical tips for representing clients. HBOR became effective on January 1, 2013 and codifies the broad intentions of the National Mortgage Settlement’s pre-foreclosure protections. It also provides tenants in foreclosed properties with a host of substantive and procedural protections. The training will cover the interplay of HBOR with NMS, CFPB servicing rules, and the Protecting Tenants at Foreclosure Act. We will also discuss HBOR’s attorney fee provisions. Registration information will be available soon.

Watch your inbox for a save the date for our next training in the Inland Empire—coming soon.

The HBOR Collaborative, a partnership of four organizations, National Housing Law Project, National Consumer Law Center, Tenants Together and Western Center on Law and Poverty, offers free training, technical assistance, litigation support, and legal resources to California’s consumer attorneys and the judiciary on all aspects of the new California Homeowner Bill of Rights, including its tenant protections. The goal of the Collaborative is to ensure that California’s

5 Hours of MCLE Credit

Lunch will be provided.

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homeowners and tenants receive the intended benefits secured for them under the Homeowner Bill of Rights by providing legal representation with a broad array of support services and practice resources.

To contact the HBOR Collaborative team or for more information on our services for attorneys, please visit http://calhbor.org/

The HBOR Collaborative and its services, including this free training for attorneys, are funded by a grant from the Office of the Attorney General of California from the National Mortgage Settlement to assist California consumers. This training would not be possible without the invaluable support of our partners the California State Bar and Housing Opportunities Collaborative.