Mortgage Banking Update - July 23, 2018
In a recent decision, a federal court in the Southern District of New York (SDNY) dismissed a putative class action complaint alleging, among other things, that a mortgage servicer violated the Fair Debt Collection Practices Act (FDCPA) by charging improper property inspection fees after the mortgagors defaulted on their mortgage loans. The plaintiffs claimed that the charges were "excessive," "[un]reasonable," and "[in]appropriate," and alleged that they were frequently assessed when property inspections had not been conducted. Thus, the plaintiffs argued that the servicer "knowingly misrepresented" the charges as "lawful," "reasonable," "legitimate," and "proper," when it "knew that the inspections were not necessary to maintain or protect the properties."
While the court found that the defendant was not a "debt collector," it held that the claim would fail even if the servicer were subject to the FDCPA because the terms of the mortgage agreements expressly permitted the lender to charge property inspection fees in the event of a default. Therefore, the servicer could only be found liable if the FDCPA imposed a duty to disclose "that the fees were not reasonable and Plaintiffs were therefore not obligated to pay." The court held that the FDCPA imposes no such duty, and found persuasive the reasoning in another recent decision from the SDNY, which addressed the same argument (that the defendant "fail[ed] to disclose that the assessed [property inspection] fees were unnecessary") in the context of a civil RICO claim. In that case, the court found that the plaintiff was unable to satisfy RICO's misrepresentation requirement because, as with the recent case, the underlying mortgage agreement "explicitly authorize[d] property inspections." Accordingly, the claim was governed by the terms of the mortgage and plaintiff’s dispute of those terms – and if meritorious, the defendant's "failure to 'concede breach of contract liability'" – did not "create additional causes of action." Applying this reasoning, the court concluded that the defendant did not make any false or misleading statements regarding the property inspection fees, because it "label[ed] them for what they were" – and the plaintiffs' belief that the fees were excessive or unreasonable – even if justified – did not render them actionable under the FDCPA.
The court's findings (while largely dicta) are notable because, despite numerous recent appellate court decisions involving post-default fees, few courts have specifically addressed "whether charging mortgagors for allegedly unreasonable . . . fees in the event of default . . . amounts to an FDCPA violation." By affirming that that the terms of the mortgage control, the court clarified that mortgage servicers (even if they qualify as "debt collectors") do not run afoul of the FDCPA by assessing default-related fees and costs that are permitted under the terms of the mortgage – even if the consumer finds them to be "excessive" or "unreasonable." Notably, however, the court left open the possibility of a viable FDCPA claim based on "concealed or inflated" property inspection fees. And while the distinction between "excessive" and "inflated" fees may be debatable, the latter term seems (at least under this court's reasoning) to suggests an element of scienter or willfulness on the part of the servicer. This comports with the court's reference to the standard applied under RICO and suggests the fee assessed by the servicer must misrepresent – rather than merely misapply – the terms of the mortgage.
CFPB Issues Report on Final Student Loan Payments and Broader Household Borrowing
The Consumer Financial Protection Bureau (CFPB) has issued a new report, Data Point: Final Student Loan Payments and Broader Household Borrowing, which examines repayment patterns for student loans and how borrowers who have repaid their student loans subsequently use credit. The CFPB's analysis focuses on borrowers when they first pay off individual student loans. The report uses data from the CFPB's Consumer Credit Panel, a nationally representative sample of approximately five million de-identified credit records maintained by one of the three nationwide credit reporting companies.
Key findings include:
- Most borrowers paying off a student loan do so before the scheduled due date of the final payment, often with a single large final payment. The median final payment made on a student loan is 55 times larger than the scheduled payment (implying a payoff at least 55 months ahead of schedule), with 94 percent of final payments exceeding the scheduled payment and only 6 percent of loans paid off with the final few payments equal to the scheduled payments.
- Most borrowers paying off a student loan early also simultaneously reduce their credit card balances and make large payments on their other student loans. These borrowers are also 31 percent more likely to take out their first mortgage loan in the year following the payoff. While this evidence shows that early student loan payoffs coincide with increased home purchases, the simultaneous reduction in credit card and other student loan balances suggests that increased wealth or income may influence when borrowers pay off student loans, reduce credit card balances, and purchase homes.
- Most borrowers who pay off a student loan by making all of the scheduled payments pay down other debts in the months following payoff rather than take on new debt. Those borrowers with additional student loans put 24 percent of their newly available funds toward paying down other student loans faster and and 16 percent toward reducing credit card balances. Unlike borrowers paying off a student loan early, borrowers paying off on schedule are not more likely to take out a mortgage for the first time.
The CFPB observes that because the results discussed in the report show that repayment of one type of debt directly affects payments and borrowing on other kinds of debt, "policies and products that change repayment terms or balances for one credit product are likely to have spillover effects on others, either enhancing the intended effects (for example, payment relief and increased credit access) or leading to compensating shifts (such as reallocated payments or borrowing)." As a result, the CFPB believes that analyzing borrower behavior across all liabilities can improve its understanding of the underlying mechanisms that influence behavior and allow it to more accurately predict the impact of new policies or products on consumers and the overall marketplace.
The CFPB also notes that while its analysis focuses on student loan borrowers who successfully pay off their loans, similar approaches could be applied to struggling student borrowers and might shed light on how borrowers use other credit products to cope with their student debt, how their access to other credit may be inhibited, and how available repayment plans and other programs change these outcomes.
The NMLS Mortgage Industry Report for the first quarter of 2018 has been made available on the NMLS website (NMLS Reports). The report compiles data on mortgage companies, branches, and mortgage loan originators. Among other findings, the report reflects an increase in both licensed companies and loan originators over the prior 12month period.
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