Legal Alert

Mortgage Banking Update - March 26, 2020

March 26, 2020
In This Issue:


Consumer Finance Monitor Launches COVID-19 Resource Center for Financial Services; Materials Available From Ballard Spahr Webinar

Ballard Spahr’s Consumer Financial Services, Banking and Financial Institutions, and Mortgage Banking Groups are closely monitoring regulatory developments in connection with the coronavirus (COVID-19) crisis. To provide one location where members of the banking and consumer financial services industries can access federal regulatory guidance and other information that relates to issues of particular concern to their industries, the Consumer Finance Monitor has launched a Banking and Consumer Financial Services COVID-19 Resource Center.

For our clients and others interested in monitoring COVID-19 developments involving debt collection or telemarketing, we have also made a national tracking program available for a monthly flat fee.

To access materials from Ballard Spahr’s March 25 webinar, “What Financial Institutions Need to Do Now as a Result of the Coronavirus Pandemic,” click hereenter your information, and click Register.

- Barbara S. Mishkin

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4th Circuit Rules Plaintiffs Have No Standing to Sue Based on Mere RESPA Statutory Violation Claim

A three-judge panel of the U.S. Court of Appeals for the Fourth Circuit (Fourth Circuit) recently held in Baehrs v. The Creig Northrop Team et al that although the plaintiffs had alleged a violation of the Real Estate Settlement Procedures Act (RESPA), they lacked standing under Article III of the U.S. Constitution to sue because they could not establish an injury-in-fact. Accordingly, the Fourth Circuit directed the district court to dismiss the plaintiffs’ complaint.

In connection with their purchase of a home in July 2008, the Baehrs engaged a real estate agent who was a member of The Creig Northrop Team (The Northrop Team) to represent them. After the Baehrs’ offer to purchase the home was accepted, the agent informed them that Lakeview Title Company (Lakeview) would provide the settlement services necessary to complete the purchase and that The Northrop Team did all of its settlements at Lakeview.

In March 2013, after being solicited by a lawyer, the Baehrs, as representatives of a putative class, filed a lawsuit against The Northrop Team, Lakeview and others. In an initial and subsequent complaint, the Baehrs alleged that the defendants were involved in an unlawful kickback scheme from 2000 to 2014. The Baehrs did not assert that they were overcharged for the services provided by Lakeview as a result of the claimed kickback arrangement. In the subsequent complaint, apparently trying to address the statute of limitations, the Baehrs alleged that the kickbacks were concealed using a sham marketing agreement between The Northrop Group and Lakeview in which Lakeview agreed to pay The Northrop Team for marketing services. Also, apparently trying to also demonstrate actual harm, the Baehrs alleged that because of the alleged kickback arrangement, they “were deprived of an impartial and fair competition between settlement service[s] providestrs in violation of RESPA.”

The defendants moved for summary judgment claiming that (1) the Baehrs’ claim was not subject to equitable tolling and thus was barred by RESPA’s one-year statute of limitations; and (2) the Baehrs had not suffered a concrete injury and thus lacked Article III standing to sue. The district court awarded summary judgment to the defendants on the grounds that the Baehrs lacked Article III standing because they were not overcharged for settlement services and had not otherwise suffered a concrete injury as necessary to establish an injury-in-fact. The district court also determined that their claim was barred by the one-year RESPA statute of limitations because the Baehrs were not diligent in investigating The Northrop Team’s affiliation with Lakeview.

In 2012, after the U.S. Supreme Court granted certiorari in First American Financial v. Edwards, the mortgage and settlement services industry eagerly awaited a decision on whether an allegation of a RESPA violation, by itself, gave a private purchaser of real estate settlement services standing to sue in federal court in the absence of any claim that the alleged violation affected the price, quality, or other characteristics of the settlement services provided. The underlying issue was whether such a plaintiff had suffered an injury-in-fact that provided standing to sue under Article III of the U.S. Constitution. To the industry’s disappointment, the Supreme Court did not decide the issue and instead issued an order stating only: “The writ of certiorari is dismissed as improvidently granted.” In other words, never mind.

Subsequently, in its 2016 decision in Spokeo, Inc. v. Robins, the Supreme Court addressed the question of whether a plaintiff who cannot show any actual harm from a violation of the Fair Credit Reporting Act (FCRA) nevertheless has Article III standing to sue for statutory damages in federal court. The Court held that a plaintiff alleging an FCRA violation does not have Article III standing to sue for statutory damages in federal court unless the plaintiff can show that he or she suffered “concrete,” “real” harm as a result of the violation.

Based on Spokeo, the Fourth Circuit noted that although intangible harm can constitute a concrete injury, a statutory violation is not necessarily synonymous with an intangible harm that constitutes an injury-in-fact. The Fourth Circuit stated that a plaintiff who sues to vindicate a statutory right still must establish a concrete injury resulting from the violation of that right: “That is, a plaintiff cannot merely allege a ‘bare procedural violation, divorced from any concrete harm’ and ‘satisfy the injury-in-fact requirement of Article III.’” The Fourth Circuit also stated that the strictures of Article III standing are no less important in the context of class actions. The court then turned to the four claims made by the Baehrs to establish concrete injury.

As they had done in the district court, the Baehrs claimed that the deprivation of impartial and fair competition between settlement services providers is a concrete injury under RESPA, and that an overcharge is not necessary to have standing to bring a RESPA kickback claim. The Baehrs also advanced three theories of concrete injury not alleged in the lower court:

  1. The Baehrs claimed The Northrop Team owed them a fiduciary duty to return to them any kickback paid by Lakeview and to provide impartial advice and advocacy.
  2. Based on Spokeo’s instruction for courts “to consider whether an alleged intangible harm has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts,” the Baehrs claimed that they suffered a concrete injury because The Northrop Team was unjustly enriched.
  3. Based on a Bankruptcy Code provision that authorizes damages where a bankruptcy petition preparer improperly renders legal advice, the Baehrs argued that they suffered a concrete injury by paying for settlement services provided in contravention of RESPA.

Addressing the Baehrs’ claim that the deprivation of impartial and fair competition between settlement services providers is a concrete injury under RESPA, the Fourth Circuit stated that because injury-in-fact is a “hard floor” of Article III standing “that cannot be removed by statute,” the question for the court is whether such deprivation— an intangible harm — is nevertheless a concrete injury. According to the Fourth Circuit the Supreme Court set forth two considerations in Spokeo— historical practice and congressional judgment — that are “instructive” for determining whether an intangible harm constitutes a concrete injury.

In the Fourth Circuit’s view, the Baehrs’ claim was not based on a harm traditionally regarded as providing a basis for a lawsuit in English or American courts. It considered their argument to be predicated on Congress’s inclusion of a cause of action in RESPA for damages sustained through settlement service referrals sullied by kickbacks.

The Fourth Circuit stated that the harm that Congress sought to prevent through the RESPA kickback prohibition is the increase in settlement costs that tends to result from the interference with the market for settlement services that is caused by kickbacks and not interference with the market for settlement services, by itself. Because the Baehrs contended that their injury resulted from being deprived of impartial and fair competition between settlement services providers, and not from being overcharged by Lakeview, the court determined that the Baehrs did not allege a concrete injury under RESPA. The court then turned to the Baehrs’ three new theories of concrete injury.

First, because the Baehrs had not established the existence of a fiduciary duty, the Fourth Circuit rejected their claim of concrete injury based on the theory that The Northrop Team owed them a fiduciary duty. Second, because it viewed unjust enrichment as a restitutionary remedy that does not focus on harm suffered by a plaintiff but instead focuses on a defendant’s receipt of a recognizable benefit that would be inequitable for the defendant to retain, the court rejected the Baehrs’ theory that they suffered a concrete injury because The Northrop Team was unjustly enriched. Third, with respect to the Baehrs’ theory that, based on a single provision of the Bankruptcy Code, they suffered a concrete injury by paying for settlement services provided in contravention of RESPA, the Fourth Circuit stated that it was “satisfied to reject this under-developed theory because it is at odds with Spokeo’s mandate that a statutory violation ‘divorced from any concrete harm’ is insufficient to establish injury-in-fact.”

Having rejected all of their theories of concrete injury, the Fourth Circuit concluded that the Baehrs lacked Article III standing to sue. As a result, the Fourth Circuit ruled that the district court should not have entered summary judgment in favor of the defendants and instead should have dismissed the complaint. Accordingly, the Fourth Circuit vacated the grant of summary judgment and remanded the case to the district court to dismiss the complaint.

In its discussion of the facts, the Fourth Circuit noted that the Baehrs were not first-time home buyers and understood that they were free to procure settlement services from any provider thereof, but they “were satisfied” that the agent would select the settlement company. The court also noted that the Baehrs did not inquire about the Lakeview’s rates, quality of service, or affiliation with The Northrop Team because they had “contracted with a reputable company” — that is, The Northrop Team — and believed that The Northrop Team “would have [their] best interest.” In addition, the Fourth Circuit twice stated that based on the record, the Baehrs were satisfied with their experience purchasing the home and the settlement services that Lakeview had provided and that, even after learning of the purported kickback scheme, they believed that Lakeview was entitled to the fees it charged for the work that it did.

Thus, it appears the Fourth Circuit viewed the case as involving plaintiffs who, before being solicited by an attorney, believed that they had paid a fair price for services for which they were satisfied, and that the title company deserved the fees that it received. This perception may have significantly contributed to the court’s unwillingness to accept creative theories attempting to establish the concrete injury that a plaintiff needs to have Article III standing to sue. While the plaintiffs can request a review of the decision by the full Fourth Circuit, or seek Supreme Court review, the panel’s decision potentially may finally bring an end to this long-running battle regarding Article III standing to bring a RESPA claim.

- Richard J. Andreano, Jr. & Barbara S. Mishkin

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This Week’s Podcast: The CFPB’s Winter 2020 Supervisory Highlights: Takeaways for Payday Lenders and Mortgage Servicers

We look at the CFPB’s key findings related to payday lending and mortgage servicing, discuss their implications for the CFPB’s approach to supervision and enforcement, and share practical takeaways for lenders and servicers, including how the CFPB’s findings related to loss mitigation requirements might be used by servicers to inform how they approach disruptions arising from the current coronavirus outbreak.

Click here to listen to the podcast.

Presented by Alan S. Kaplinsky, Christopher J. Willis, Reid F. Herlihy, and Jason M. Cover

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Ninth Circuit Rules Passive Debt Buyers Qualify as ‘Debt Collectors’ Under FDCPA

The U.S. Court of Appeals for the Ninth Circuit ruled in McAdory v M.N.S. Associates, LLC and DNF Associates, LLC, in a 2-1 decision, that companies that engage third parties to collect consumer debts they acquired when the debts were in default, known as “passive debt buyers,” qualify as “debt collectors” subject to the Fair Debt Collection Practices Act (FDCPA).

The majority opinion relied on the Third Circuit’s decision last year in Barbato vs. Crown Asset Management which reached a similar conclusion. Like Barbato, the Ninth Circuit’s decision continues to erode any potential defenses to FDCPA claims available to passive debt buyers following the U.S. Supreme Court’s 2017 decision in Henson vs. Santander Consumer USA Inc. The Ninth Circuit’s decision highlights the need for such entities to reevaluate their business practices, discuss the implications of these decisions with third parties performing collection work, and establish procedures to monitor the third party’s collection efforts.

In McAdory, the retailer to whom the plaintiff owed a debt sold the debt to DNF Associates, which engaged MNS Associates to collect the debt. The plaintiff filed a lawsuit in federal district court against DNF and MNS alleging FDCPA claims against both defendants based on a voicemail message left by MNS and the withdrawal of funds from the plaintiff’s account by MNS.

The district court granted DNF’s motion to dismiss, ruling that the plaintiff’s complaint failed to state a claim against DNF because debt buyers such as DNF “who have no interactions with debtors and merely contract with third parties to collect on the debts they have purchased simply do not have the principal purpose of collecting debts.”

The Ninth Circuit framed the issue as “whether a business that buys and profits from consumer debts, but outsources direct collection activities, qualifies as a ‘debt collector’ for purposes of the [FDCPA].” Consistent with Henson, DNF argued that its principal purpose was not collecting debt, but buying debt for investment purposes. The Ninth Circuit determined that it did not have to consider that argument, calling it a “newly raised fact-based argument,” because the plaintiff’s complaint sufficient alleged that DNF’s principal purpose was to collect debt.

Instead, in reversing the district court, the Ninth Circuit ruled that the plaintiff’s allegations were sufficient to allege that DNF was a debt collector under the FDCPA, “regardless of whether DNF outsources debt collection activities to a third party.” According to the Ninth Circuit, the relevant question in applying the principal purpose definition “is whether debt collection is incidental to the business’s objectives or whether it is the business’s dominant, or principal, objective.” It rejected the DNF’s argument that the language of the principal purpose definition requires the business’s principal purpose to be “the act of collecting debts” or that other FDCPA provisions supported the district court’s conclusion that Congress intended the principal purpose definition to apply only to those who have direct contact with consumers.

Although the Ninth Circuit rejected DNF’s reading of the principal purpose definition, it noted that it was not directing the district court on remand “to discard the application of familiar principles of agency law when it addresses vicarious liability,” nor was it suggesting “that one businessperson may be liable for another just because they are in the same business.” Thus, the Ninth Circuit left the door open for the district court, applying agency principles, to find that the plaintiff had not established that DNF was vicariously liable for MNF’s alleged FDCPA violations.

- Stefanie Jackman

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The CFPB recently updated its Home Mortgage Disclosure Act (HMDA) FAQs, regarding the reporting of race, ethnicity and sex for applications taken by mail, internet or telephone.

The CFPB addresses the following question:

If a natural person applicant submits a mail, internet, or telephone application under Regulation C but does not provide race, ethnicity, or sex information, what should the financial institution report regarding whether this information was collected on the basis of visual observation or surname?

The CFPB advises that in such a situation, if the institution does not have an opportunity to collect this information during an in person meeting during the application process, it may report either that the information was not collected on the basis of visual observation or surname (code 2) or that the requirement to report this data field is not applicable (code 3). In order to promote the consistency of data across all HMDA reporting institutions, the CFPB suggests, but does not require, that financial institutions use code 2.

- Richard J. Andreano, Jr.

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Industry Trade Groups Respond to FHFA Request for Input on PACE Transactions

In January 2020 the Federal Housing Finance Agency (FHFA) published a request for input on Property Assessed Clean Energy (PACE) transactions involving residential property. FHFA describes PACE transactions as being part of residential energy retrofitting programs that are created through special state legislation and result in the financed part of the transaction resulting in a tax assessment on the home, which is a ‘‘super-priority lien’’ over existing and subsequent first mortgages. (As previously reported, pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act (Act) the CFPB is conducting rulemaking to extend Truth in Lending Act ability-to-repay requirements to PACE transactions.)

The FHFA notes in the request for input that previously it directed Fannie Mae and Freddie Mac not to purchase mortgage loans on homes that are subject to a lien in connection with a PACE transaction. FHFA also notes that the Federal Housing Administration (FHA) will not insure loans on homes that are subject to a lien in connection with a PACE transaction. In the Request for Input, the FHFA seeks comment on enhancing the actions taken regarding PACE transactions.

In particular, the FHFA seeks comments on whether it should direct Fannie Mae and Freddie Mac to (1) decrease loan-to-value (LTV) ratios for all new loan purchases in states or in communities where PACE loans are available, or (2) increase their Loan Level Price Adjustments (LLPAs) or require other credit enhancements for mortgage loans or re-financings in communities with available PACE financing.

The deadline to respond to the request was March 16, 2020. Among the various comments, a number of industry trade organizations joined in a comment letter. In the letter, the organizations state “[w]e jointly write . . . to express our significant concern with FHFA’s consideration of options to limit access to conventional financing for borrowers with less than a 20% down payment simply because they live in jurisdictions where PACE financing may be available. A decrease in allowable [LTV] ratios for new home purchases in jurisdictions that permit PACE financing would be unnecessarily punitive to the millions of consumers who live in those jurisdictions and who would be affected negatively due to the presence of PACE financing in that area.”

With regard to the request for input on the increase of LLPAs, the organizations oppose such a policy and state that “increased LLPAs would be an unnecessary and burdensome fee for homebuyers that is unrelated to their personal credit profiles. This policy would amount to an arbitrary and speculative tax on homebuyers in select jurisdictions and is not grounded in the reality of the risk posed by any one borrower’s loan.” The organizations note that had such a policy been in effect in 2019, the “arbitrary fees” could have applied to nearly one million home purchase transactions in the three states (California, Florida and Missouri) that permit residential PACE financing.

The organizations joining in the joint comment letter are the California Mortgage Bankers Association, Credit Union National Association, Housing Policy Council, Leading Builders of America, Mortgage Bankers Association, Mortgage Bankers Association of Florida, Mortgage Bankers Association of Missouri, National Association of Federally-Insured Credit Unions, National Association of REALTORS®, Real Estate Services Providers Council, Inc. (RESPRO), and U.S. Mortgage Insurers.

- Richard J. Andreano, Jr.

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Maryland Federal District Court Rules Choice-of-Law Provision Applies to Effect of Partial Payment on Statute of Limitations Revival in FDCPA Lawsuit

A Maryland federal district court, in Jennings v. Dynamic Recovery Solutions LLC, ruled that the effect of a partial payment on revival of the statute of limitations was governed by the law of Delaware, the state designated in the choice-of-law provision in the plaintiff’s credit agreement, rather than the law of Maryland, the forum state. Because Delaware law permitted revival, the court found that the plaintiff had stated a plausible claim that the defendant violated the FDCPA by not disclosing, in a letter offering options for settling a time-barred debt, that the plaintiff’s acknowledgment of the debt or partial payment could restart the statute of limitations on the debt.

In Jennings, the plaintiff’s credit agreement contained a Delaware choice-of-law provision. The debt collector sent a letter to the plaintiff providing options for her to settle her debt by paying an amount less than the full account balance. The letter stated the because of the debt’s age, the creditor and debt collector could not sue the plaintiff for the debt or report it to a consumer reporting agency. The plaintiff subsequently filed a putative class action complaint against the debt collector in Maryland, the state in which she presumably resided, alleging that it had violated the FDCPA by failing to disclose that by agreeing to a settlement offer or making a partial payment, the statute of limitations would be revived and allow the debt collector to sue the plaintiff for the debt.

The initial question considered by the court was whether the debt revival issue was governed by Delaware or Maryland law. While under Delaware law the statute of limitations can be revived through acknowledgment of a debt or partial payment, Maryland law does not permit revival under such circumstances. Maryland courts generally apply the statute of limitations of the forum state even when that state’s choice of law rules require another state’s substantive law to be applied. According to the district court, the resolution of the question of which state’s law governed revival turned on whether the effect of acknowledgment or partial payment was procedural because it implicates the statute of limitations, making it subject to Maryland law, or substantive, making it subject to Delaware law. In the court’s view, it was “a more honest and accurate characterization” to consider the potential for revival to be a substantive matter rather than a procedural matter. Accordingly, the court concluded that Delaware law should apply, meaning that the plaintiff’s acceptance of a settlement or partial payment could have revived the statute of limitations.

Having determined that Delaware law applied, the court then concluded that the debt collector’s failure to disclose in its letter that the plaintiff’s agreement to a settlement offer or partial payment could revive the statute of limitations stated an FDCPA claim. Specifically, it found that the plaintiff had stated a plausible claim that the debt collector violated the FDCPA provisions prohibiting the false representation of a debt’s character, amount or legal status or the use of a false representation or deceptive means to collect a debt.

The debt collector had moved to dismiss the plaintiff’s entire complaint, which also included a claim for a violation of the FDCPA provision prohibiting the use of unfair or unconscionable means to collect a debt. While dismissing this claim because the plaintiff had failed to allege how the conduct on which it was based was separate and distinct from the conduct covered by her other FDCPA claims, the court denied the debt collector’s motion to dismiss the balance of the complaint.

- Stefanie Jackman

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ACA International Asks CFPB to Extend Comment Period for Supplemental Debt Collection Proposal

In light of the disruption caused by the COVID-19 pandemic, ACA International has asked the CFPB for a 30-day extension of the deadline for filing comments on its supplemental debt collection proposal. The proposal would require debt collectors to make specified disclosures when collecting time-barred debts. The current comment deadline is May 4, 2020.

- Stefanie Jackman

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This Week’s Podcast: A Look at How the Latest Modifications to the Proposed CA Consumer Privacy Act Regulations Impact the Debt Industry

In this podcast, we discuss the latest modifications to the proposed CCPA regulations with Lauren Valenzuela, Corporate Counsel for Performant Financial, a provider of technology-based solutions to assist debt recovery. Our discussion covers topics relevant to the debt industry, including the potential impact for debt collectors and other service providers indirectly collecting consumer data; changes for processing household requests; availability of GLBA and other exemptions; issues for users of artificial intelligence; relationship of CCPA opt-outs and FDCPA cease and desist requests; areas needing more clarification.

Click here to listen to the podcast.

Presented by Alan S. Kaplinsky, Christopher J. Willis, Stefanie Jackman, & Kim Phan

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Did You Know?

Idaho Amends Mortgage Licensing Statutes to Cover Mortgage Servicing and Temporary Authority to Operate as an MLO

The Idaho legislature recently amended the Idaho Residential Mortgage Practices Act to add provisions requiring mortgage servicers to be licensed as a Mortgage Lender and also permitting mortgage loan originators to act with temporary authority during certain transition periods. The term “mortgage lender” means any nonexempt organization that makes residential mortgage loans to borrowers and performs mortgage lending activities. Because the definition of “mortgage lending activities” is now expanded to include “servicing a residential mortgage loan on behalf of any person,” mortgage servicers will fall within the definition of “mortgage lenders” and will be required to obtain a Mortgage Lender License.

In addition, Idaho has followed suit with many other states in adopting provisions to permit temporary authority to operate as a mortgage loan originator pursuant to the amendments to the SAFE Act created by the Economic Growth, Regulatory Relief, and Consumer Protection Act.

These amendments will become effective on July 1, 2020.

New York Adopts Regulations Requiring Reverse Mortgage Lenders to Obtain License and Approval

The New York Department of Financial Services recently adopted emergency regulations, which implement Assembly Bill 5626, requiring any person or entity making reverse mortgage loans to be licensed as a mortgage banker (unless exempt) and to apply and be granted approval to make reverse mortgage loans by the Superintendent. The regulations also contain requirements addressing advertising restrictions, making certain disclosures on loan documents, and maintenance of the real property securing the reverse mortgage loan, among others.

The emergency regulations became effective on March 5, 2020.

- Aileen Ng

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Looking Ahead


Tempe, AZ | April 23-24, 2020

Social Media – Staying Compliant while Staying Connected

Speakers: Richard J. Andreano, Jr. & Kim Phan


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Copyright © 2020 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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