Consumer Compliance Outlook: First Quarter 2011

On the Docket: Recent Federal Court Opinions

REGULATION B - EQUAL CREDIT OPPORTUNITY ACT (ECOA)

Spousal signature violation as a defense to enforcing spousal guaranty after statute of limitations has expired. In re Westbrooks External Site, 440 B.R. 677 (Bankr. M.D.N.C. 2010). When a company applied for financing, the lender required a guaranty from the company's owners and their wives. The loan was later modified and additional credit extended, and the lender required spousal signatures each time. Another lender later acquired the promissory notes and attempted to collect on the guaranties. One of the owners filed for bankruptcy and filed a lawsuit in bankruptcy court with his wife to void her guaranty. The lawsuit alleged that the lender violated §202.7(d)(1) and (d)(5) of Regulation B by requiring the wife's guaranty of the loan without first determining the husband was not independently creditworthy for the amount and terms requested. The lender filed a motion to dismiss based on the ECOA's two-year statute of limitations. The court denied the motion, noting that numerous cases have held that the statute of limitations does not bar ECOA violations asserted defensively in response to a debt collection lawsuit. The lender also argued that the husband and wife were guarantors, not “applicants,” and therefore lacked standing to sue under ECOA and Regulation B. The court rejected this argument because the definition of “applicant” in §202.2(e) was specifically broadened in 1985 to include guarantors for purposes of §202.7(d).

REGULATION X - REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)

Servicer's obligations in responding to a RESPA qualified written request (QWR). Catalan v. GMAC Mortgage Corp. External Site 629 F.3d 676 (7th Cir. 2011). The Seventh Circuit issued an important decision concerning QWRs. Section 6(e) of RESPA requires servicers to acknowledge receipt of a QWR within 20 business days, take action within 60 business days, and not report negative information to the consumer reporting agencies during the 60-day period. The borrowers sued their loan servicers (original and assignee) for QWR violations after payments were not properly credited, late fees were improperly assessed, and a servicer tried to foreclose. Before filing suit, the borrowers sent several letters to the servicers to resolve these issues without success. The problems were corrected only after the borrowers contacted HUD, which insured the loan. The trial court dismissed one of the servicers because of RESPA's safe harbor, which applies if a servicer discovers an error, corrects it, and sends notice to the borrower within 60 days and before receiving a QWR. The Seventh Circuit reversed the dismissal because the servicer had not sent the required notice to the borrowers. The court also clarified the legal test for a borrower communication to qualify as a QWR: “RESPA does not require any magic language before a servicer must construe a written communication from a borrower as a [QWR] and respond accordingly… Any reasonably stated written request for account information can be a [QWR].” The court remanded the case to the trial court for further proceedings. RESPA was amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act to shorten the QWR response deadlines. A servicer will have five business days to acknowledge receipt of a QWR, 30 business days to respond, and an optional 15-day extension if notice is provided to the borrower. These changes will become effective 12 months after final implementing regulations are issued.

RESPA does not apply to an undivided loan discount fee. Freeman v. Quicken Loans, Inc. External Site, 626 F.3d 799 (5th Cir. 2010) and Wooten v. Quicken Loans, Inc. External Site, 626 F.3d 1187 (11th Cir. 2010). In two separate cases, the Fifth and Eleventh Circuits affirmed the dismissal of class-action lawsuits alleging that Quicken Loans violated §8(b) of RESPA by charging a loan discount fee on mortgages without providing a rate reduction. Section 8(b) prohibits fee splitting of an unearned fee. The federal appeals courts are divided on how this should be interpreted. The Fourth, Seventh, and Eighth Circuits have determined that this section is exclusively an anti-kickback provision prohibiting the splitting or transfer of an unearned fee between two or more parties. The Second, Third, and Eleventh Circuits have determined that §8(b) prohibits any fee charged for unearned services, even if no splitting or transfer of fees occurs. In these two cases, the plaintiffs alleged an unearned fee (charging a loan discount fee without providing a rate reduction) but did not allege that the fee was split with another party. The Fifth Circuit in Freeman held the language of §8(b) stating “no person shall give and no person shall accept” requires two parties splitting a fee. Because Quicken Loans did not split the loan discount fee, RESPA did not apply. In Wooten, the Eleventh Circuit also dismissed the RESPA claim of charging an unearned loan discount fee but used a different analysis. The court noted that RESPA's scope is limited to “settlement services.” Regulation X defines “settlement” as “the process of executing legally binding documents regarding a lien on property that is subject to a federally related mortgage loan.” The court noted that the “service” referred to in RESPA includes “any act undertaken to bring about the execution of a mortgage and note.” The court affirmed the dismissal of the case based on its conclusion that charging loan discount points did not constitute a “service” under this definition.

FAIR CREDIT REPORTING ACT (FCRA)

FCRA preempts state law claim against furnisher of credit information. Ross v. FDIC External Site, 625 F.3d 808 (4th Cir. 2010). The plaintiff lived in a house that her ex-husband had purchased with a mortgage that was eventually assigned to Washington Mutual Bank (WaMu). She had obtained a court order naming her the sole owner of the property, although her ex-husband remained the sole obligor for the loan. The plaintiff notified WaMu of these changes, but WaMu inadvertently listed the plaintiff's name on the mortgage as an obligor when it entered the information in its systems. When the loan later went into default, WaMu reported negative information about the plaintiff to the consumer reporting agencies (CRAs). The plaintiff notified WaMu about this issue, and it eventually corrected the reporting to the CRAs; however, the plaintiff later learned that WaMu was still providing negative reporting to one of the CRAs. The plaintiff sued WaMu in state court for violating the FCRA and the North Carolina Unfair and Deceptive Trade Practices Act (NCUDTPA), and the trial court dismissed the case. On appeal, the Fourth Circuit affirmed the dismissal of the FCRA claim because the lawsuit was outside the FCRA's two-year statute of limitations. The court also affirmed the dismissal of the NCUDTPA claim because of the broad preemption provision in the FCRA for state law claims against furnishers: “No requirement or prohibition may be imposed under the laws of any State...with respect to any subject matter regulated under... section 1681s-2 of this title, relating to the responsibilities of persons who furnish information to consumer reporting agencies...”