On the Docket: Recent Federal Court Opinions
REGULATION Z — TRUTH IN LENDING ACT (TILA), REGULATION X — REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA), and FAIR DEBT COLLECTION PRACTICES ACT (FDCPA)
The Second Circuit holds that loan assignees are not creditors for purposes of the TILA’s credit balance refund provision. Vincent v. The Money Store, 
736 F.3d 88 (2d Cir. 2013). The plaintiffs in this class-action lawsuit obtained mortgages from creditors who later assigned them to The Money Store. The plaintiffs alleged that The Money Store violated Section 165 of the TILA, 15 U.S.C. §1666d, by failing to refund credit balances on their accounts. The trial court dismissed the TILA claim. On appeal, the Second Circuit affirmed, holding that the TILA provision at issue only applies to creditors, which Section 103(g) of the TILA defines in part as “the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement,” 15 U.S.C. §1602(g). Because The Money Store was not the person to whom the obligations were initially payable, the court held that The Money Store was not a “creditor” under the TILA. The plaintiffs also tried to argue that The Money Store was the creditor for borrowers whose notes were assigned to The Money Store shortly after consummation because they sent their first payment to The Money Store. But the court held that the TILA defines a creditor solely by reference to the person to whom the loan is initially payable on the face of the note and not by reference to whom the first payment is actually made. The court acknowledged that its interpretation leads to the anomalous result that creditors purchasing notes are not subject to the TILA’s requirement to refund credit balances. But the court determined this was an unintended result from a 1980 amendment to the TILA to limit lawsuits against assignees, who did not prepare the initial TILA disclosure statements but were often sued for disclosure violations. The amendment limits assignee liability to TILA violations apparent on the face of the disclosure statement, but it did not address an assignee’s obligations under the TILA’s billing provisions. The court held that only Congress could address this issue.
The court also addressed whether The Money Store could be liable as a debt collector under the FDCPA. The FDCPA generally only applies to debt collectors, not creditors. However, creditors can be liable under the FDCPA when they collect their own debts using someone else’s name to suggest that a third person is collecting the debt. See 15 U.S.C. §1692a(6)(F). The Money Store retained a law firm, Moss Codilis, to prepare and mail breach notices to borrowers. The law firm sent the borrowers default notices, for which the firm was paid a fee, but performed no other services. The lawsuit alleged that as the creditor, The Money Store violated the FDCPA by falsely attempting to suggest that a third party had been retained to collect the debt. The Second Circuit held that when “a creditor, in the process of collecting its own debts, hires a third party for the express purpose of representing to its debtors that the third party is collecting the creditor’s debts, and the third party engages in no bona fide efforts to collect those debts, the creditor may be liable for violating the FDCPA.” The court determined that the appropriate inquiry was whether a third party was making a bona fide attempt to collect a debt or was merely acting as a conduit for a collection process that the creditor controls. The court of appeals reversed the trial court’s dismissal of the lawsuit and remanded the case for further proceedings. One judge dissented.
The Sixth Circuit limits servicers’ liability under the TILA but reverses dismissal of a RESPA claim. Marais v. Chase Home Finance LLC, 736 F.3d 711 (6th Cir. 2013). The plaintiff obtained a mortgage from a lender in 2006, for which Chase Home Finance was the servicer. In 2011, the plaintiff sent a Qualified Written Request (QWR) to Chase, as provided under the RESPA and Regulation X, requesting information about the loan, including the current owner of the loan. Chase did not respond in a timely way to this request, and the plaintiff filed a lawsuit alleging TILA and RESPA violations. For the TILA claim, the plaintiff alleged the servicer violated Section 131(f)(2) of the TILA, 15 U.S.C. §1641(f)(2), which requires a servicer, in response to a written request from a borrower, to identify the current owner of the mortgage. The plaintiff argued that the 2009 amendment to the TILA obligating servicers to disclose the current owner of the loan implicitly imposed liability on servicers for a violation. But the court found that the TILA’s civil liability provisions only apply to creditors and, in certain cases, to assignees. The TILA also specifically provides that a servicer is not treated like an assignee unless it is or was the owner of the loan. Because Chase merely serviced the loan, and did not own it, the court held that it could not be liable under the TILA.
For the RESPA claim, the plaintiff alleged that she suffered damages because Chase failed to provide a timely response to her QWR. The QWR alleged that Chase failed to credit payments totaling nearly $800 and overcharged the plaintiff interest by not reducing the outstanding balance by the amount of the uncredited payments. The lower court had granted Chase’s motion to dismiss, finding that the plaintiff did not establish a link between the QWR and the alleged damages. But on appeal, the Sixth Circuit found that the plaintiff sufficiently alleged a plausible RESPA claim for which she has suffered damages if the allegations are proven at trial. Moreover, the plaintiff also alleged that Chase violated the RESPA’s prohibition on negative reporting to the consumer reporting agencies within 60 days of receiving a QWR concerning disputed payments. The court of appeals therefore reversed the trial court’s dismissal of the RESPA claim and remanded the case for further proceedings.
The Sixth Circuit rejects HUD’s bona fide provider test for affiliated business arrangements. Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722 (6th Cir. 2013). The plaintiffs filed a class-action lawsuit against Welles-Bowen, a real estate agency, and its two affiliated title companies, WB Title and Chicago Title, alleging they violated the RESPA’s prohibition on referral fees for settlement services. Welles-Bowen referred the plaintiffs to WB Title to obtain title insurance, which assigned the work to Chicago Title. Section 8(c)(4) of the RESPA, 12 U.S.C. §2607(c)(4), contains a safe harbor for referrals of settlement services among affiliated companies (known as an affiliated business arrangement) if three requirements are satisfied: (1) the referral must be disclosed to the consumer, (2) the consumer must be able to reject the referral, and (3) the person making the referral cannot receive any “thing of value from the arrangement” other than “a return on the ownership interest or franchise relationship.” It was undisputed that all three requirements were satisfied in this case. However, the U.S. Department of Housing and Urban Development’s (HUD) 1996 “Policy Statement on Sham Controlled Business Arrangements” added a fourth requirement: The affiliate receiving the referrals must be a bona fide provider of settlement services, as determined under a 10-factor test. The lawsuit alleged that WB Title was not a bona fide provider of services under the policy statement and thus the safe harbor for affiliated business arrangements did not apply. The district court found that HUD’s policy statement was unconstitutionally vague and dismissed the case. On appeal, the Sixth Circuit affirmed, holding that as a matter of administrative law, HUD’s policy statement was not entitled to the judicial deference normally accorded to agency interpretations of statutes they are charged with implementing because it was not a regulation issued under the Administrative Procedure Act, which would have the force of law. The court also found that HUD’s 10-factor test for a bona fide provider did not have a basis in the statutory text and was therefore invalid.