On the Docket: Recent Federal Court Opinions
REGULATION H — NATIONAL FLOOD INSURANCE ACT (NFIA)
The First Circuit allows class-action lawsuit alleging a lender required borrowers to obtain excessive flood insurance. Lass v. Bank of America, N.A., 
695 F.3d 129 (1st Cir. 2012), petition for reh’g en banc denied (Jan. 3, 2013). Several class-action lawsuits have been filed against banks and servicers alleging that they breached their mortgage agreements and acted in bad faith by requiring borrowers to obtain more flood insurance than is permitted under their mortgage agreements and related documents. One such lawsuit against Bank of America was dismissed by a federal district court in Boston. But on appeal, the First Circuit reversed the dismissal. Bank of America acquired a mortgage from another lender and then sent notice to the borrower that $145,086 in additional flood insurance coverage was required to cover the replacement cost of the property. When the borrower failed to obtain the additional coverage, the bank force-placed it and charged the borrower’s escrow account. The lawsuit alleged that the bank was breaching a “Flood Insurance Notification” provided at loan closing, which specifically stated that flood insurance must be obtained for the loan amount or the maximum amount available, whichever is less (i.e., the amount required under the Flood Disaster Protection Act (FDPA) of 1973). The lower court dismissed the case based on a provision in the mortgage agreement stating that the lender may require the borrower to obtain hazard insurance in the amount specified by the lender. But the First Circuit reversed the dismissal, finding that the language in the mortgage agreement and flood notification was ambiguous as to whether the bank had the authority to require flood insurance coverage in excess of the amount required under the FDPA. The case was remanded for further proceedings, with one judge dissenting.
In another opinion issued on the same day, the First Circuit addressed a similar subject in Kolbe v. BAC Home Loans Servicing, LP, 695 F.3d 111 (1st Cir. 2012). In that case, the loan servicer required force-placed insurance in excess of the amount identified in the mortgage agreement for a Federal Housing Administration (FHA) loan. Subsequently, the First Circuit granted the bank’s motion to vacate the three-judge panel’s decision and have the entire court (en banc) decide the appeal. The case was argued to the en banc court in February 2013.
New York federal court denies motion to dismiss class-action lawsuit alleging borrowers were forced to purchase more flood insurance than permitted under their mortgage agreements. Casey v. Citibank, N.A., ___ F.Supp.2d ___, 2013 WL 11901 (N.D.N.Y. Jan 2. 2013). The two named plaintiffs, Casey and Skinner, alleged that their lenders and loan servicers improperly required them to purchase flood insurance in excess of the amount permitted under their mortgage agreements and that the defendants profited from the forced-placed flood insurance. Casey had a $25,000 FHA-guaranteed mortgage, which was subsequently sold to Citibank. Casey was later asked to increase the flood insurance coverage by $107,780. When the loan was sold again, the new lender asked him to increase the coverage to $237,349 (when the loan balance was less than $17,000). In both instances, the extra insurance was force-placed. The mortgage agreement included a clause requiring the borrower to obtain flood insurance to the extent required by the Department of Housing and Urban Development (HUD). Because HUD’s regulations for FHA loans require flood insurance in the amount of the loan balance or the maximum amount available under the NFIP (whichever is less), the borrower claimed both lenders were requiring more insurance than permitted under the mortgage agreement. The court found that the mortgage agreement could reasonably be interpreted to require coverage only in the amount of the current loan balance and denied the motion to dismiss the lawsuit. The other plaintiff, Skinner, had obtained a $142,000 mortgage and was told at origination that flood insurance was not required. The loan was later sold to Fannie Mae and serviced by CitiMortgage. The mortgage agreement required the borrower to maintain flood insurance in the amount specified by the lender. CitiMortgage notified Casey that the property was in a special flood hazard area and required $250,000 in flood insurance, which was force-placed when Skinner failed to purchase it. Skinner alleged that the force-placed insurance breached the mortgage agreement because it authorizes the lender (not the servicer) to require flood insurance. The court found that the plaintiff stated a plausible claim based on the language of the contract and denied the motion to dismiss this claim. The plaintiffs also alleged that the improper force-placed flood insurance, the cost of which was added to the loan balance, constituted a new credit transaction requiring additional disclosures under the Truth in Lending Act (TILA). The court, citing decisions from other federal courts, determined that this allegation stated a plausible claim under TILA at the pleading stage and denied the motion to dismiss this claim.
Regulation V — Fair Credit Reporting Act (FCRA)
Fifth Circuit clarifies damages available under the FCRA. Smith v. Santander Consumer USA, Inc., 703 F.3d 316 (5th Cir. 2012). The Fifth Circuit affirmed a jury award of $20,437 against a lender that negligently investigated the consumer’s dispute of information the lender furnished to TransUnion. After the information was reported to TransUnion, the consumer’s credit score dropped from 778 to 652, and the limits on his credit cards were reduced by $37,500, to $22,000. In reviewing the jury’s verdict, the court clarified the type of damages that could be compensable under the FCRA in this circumstance. The court explained that a reduction in a consumer’s credit card limits alone is not a compensable damage. “A credit line, by itself, has no monetary impact on a consumer who doesn’t borrow money. Thus, whether the credit line is $100,000 or $10,000 may impair the amount he could borrow on a credit line, but unless he takes the actual step of using the credit or showing a need for the higher amount, the consumer is unaffected.” Instead, a consumer has compensable damages from a lowered credit limit “if the consumer’s cost of actual borrowing increases or if he is refused credit altogether.” The court affirmed the jury verdict because the borrower submitted evidence at trial showing that after his credit score dropped, he was charged a higher rate to refinance his mortgage, he deferred making certain expenditures until his credit rating was restored, and he suffered mental pain and anguish.
Regulation X — Real Estate Settlement Procedures Act (RESPA)
The Ninth Circuit clarifies a servicer’s obligation in responding to a qualified written request (QWR). Medrano v. Flagstar Bank, FSB, 704 F.3d 661 (9th Cir. 2012). The Ninth Circuit affirmed the dismissal of a RESPA QWR lawsuit because the plaintiffs sent written requests to the servicer related to loan origination issues, and the QWR requirements apply only to loan servicing issues. After the servicer notified the plaintiffs that their mortgage escrow account had insufficient funds, the plaintiffs responded with three letters challenging the increased escrow, including allegations that the payment schedule in the loan documents did not accurately reflect the loan broker’s representations about the payment schedule, and a request that the monthly mortgage payment be reduced to reflect the broker’s representations. The servicer did not change the escrow and did not appear to respond to the letters. The plaintiffs’ lawsuit alleged violations of RESPA’s QWR requirements, which requires loan servicers to provide timely responses to written inquiries from borrowers about the servicing of their loans. See RESPA, 12 U.S.C. §2605(e); Regulation X, 12 C.F.R. §1024.21(e). The court said a valid QWR must reasonably identify the borrower’s name and account; state why the borrower believes the account is in error or provide detail about other information sought; and seek information about the servicing of the loan. For the third requirement, the court noted a distinction between the loan servicing and issues related to the borrower’s contractual relationship with the lender. The QWR requirements apply only to servicing issues. The court found that the plaintiffs’ letters raised loan origination issues, such as representations made by the mortgage broker, and did not raise any servicing issues. Accordingly, the court affirmed the dismissal of the lawsuit.