Case Law Newsletter

Noonan and Lieberman keeps you current on litigation news with its regular Case Law Update focusing on important and emerging trends in federal and state case law. Case Law Update is edited by attorney James V. Noonan.

Sign up for the list

The newsletter is sent out monthly.

Archive

May 2009

More California courts are demanding that a Plaintiff in a TILA rescission case allege that he or she can tender the loan proceeds.

Consumers suing in some California District Courts better think twice before asking to rescind a loan under TILA. Several recent cases from the Eastern and Northern District of California have tossed TILA rescission cases where the consumer has failed to allege in the Complaint that he or she has tendered or intends to tender the borrowed funds back to the defendants. Relying on Yamamoto v. Bank of New York, 339 F.3d 1167 (9th Cir. 2003), the courts in Carlos v. Ocwen Loan Servicing, LLC, No. CV F 09-0260LJOGSA (E.D.Cal. May 08, 2009); Sitanggang v. Indymac Bank, F.S.B., No. CVF09-0367LJOSMS (E.D.Cal. May 06, 2009); Guerrero v. Citi Residential Lending, Inc., No. CVF08-1878 LJO GSA (E.D.Cal. Apr. 03, 2009); Pagtalunan v. Reunion Mortg. Inc., No. C-09-00162EDL (N.D.Cal. Apr. 08, 2009); and Garza v. American Home Mortg., No. CV F 08-1477LJOGSA (E.D.Cal. Jan. 27, 2009), have all held that a claim for rescission requires a plaintiff to allege that the plaintiff can or will tender the borrowed funds back to the lender. In Edelman v. Bank of America Corp., No. SACV 09-00309-CJC (MLGx) (C.D.Cal., Apr. 17, 2009), the court went further and held that the consumer’s offer to pay the loan back in monthly installments on more favorable terms, or by modifying her loans, was insufficient to overcome the pleading defect. Because the offer of tender was defective, Defendant had no obligation to rescind the mortgage. These cases continue the trend we have seen whereby courts are requiring the consumer wishing to rescind a loan to demonstrate that it has the means and intent to return the loan proceeds. In Alcaraz v. Wachovia Mortg., FSB, _No. CVF081640LJOSMS (E.D.Cal. Jan. 21, 2009), the court refused to dismiss a complaint seeking injunctive relief and rescission on the grounds that the plaintiff failed to allege an ability to tender. The court deemed this a factual issue but admonished the plaintiff, subject to F.R.Civ.P. 11(b) requirements, to address the issue if she elects to amend her complaint. Note that the Southern District of California has ruled that the issue is factual and cannot (or should not) be resolved on a motion to dismiss. See, _Harrington v. Home Capital Funding, Inc., No. 08CV1579 BTM (S.D.Cal. Mar. 02, 2009); Horton v. California Credit Corp. Retirement Plan, No. 09CV274-IEG-NLS (S.D.Cal. Mar. 16, 2009).

District Court rejects the “array of services” defense to a RESPA § 8(b) claim that no settlement services were provided.

The US District Court for the Northern District of Alabama has followed the approach of its sister court in the Southern District of New York in rejecting the “array of services” defense to a Section 8 RESPA claim. In Busby v. JRHBW Realty, Inc., 2:04-CV-2799-VEH (N.D.Ala., Apr. 20, 2009) the borrower sued the loan broker over a fee it describes as an “ABC” fee at closing. This fee simply reflects the “increase in the price or fee that [defendant] charges for all its brokerage services rendered to most buyers and sellers” and is “not intended to cover a specific service (for example, a flat fee for record storage or for attendance at the closing). It therefore includes overhead. In her class action complaint, the borrower contended that this fee represent an unearned fee under Section 8(b) of RESPA. The court granted her summary judgment (and class certification). Based upon an extension of the reasoning employed in Cohen v. J.P. Morgan Chase & Co., No. CV-04-4098 (CPS), 2009 WL 212159 (E.D.N.Y. Jan. 28, 2009), the court concluded as a matter of law that the array of services defense was not a valid defense to a § 8(b) “no services” claim because the services were not settlement-related and/or provided little or no benefit to the borrower. It adopted that court’s “working definition” of what constitutes a ‘settlement service’ as that which either directly benefits the consumer, or is performed at or before the closing. This accounts for actions taken by the lender before closing that for the most part benefit the lender, such as underwriting, credit reports, and appraisals, for which RESPA clearly permits fees to be charged. It also accounts for actions performed after closing that are deemed compensable by HUD, such as in the case of prepaid insurance premiums, which are clearly beneficial to the borrowers who pay for them. According to the court, this formulation ensures that the services performed and paid for by individual borrowers are all tied to the creation of an individual loan.

Section 1679b of CROA is not limited to credit repair organizations, but claim against the brokers fails anyway because a broker cannot be liable under CROA for making a false statement in a loan application that it transmits to itself.

The loan broker and his brokerage argued in Whitley v. Taylor Bean & Whitacker Mortg. Corp., 08 C 3114 (N.D.Ill., Apr. 20, 2009) that they have no liability under the federal Credit Repair Organizations Act (CROA) which prohibits false statements to consumer reporting agencies or persons providing credit. See, 15 U.S.C. § 1679b. Plaintiff alleges that defendants violated section 1679b of the CROA “by fraudulently inflating and falsifying” information on plaintiff’s loan application and “fraudulently overstating the value of the property.” The defendant’s first argument failed. The court noted that this section of CROA does not limit liability exclusively to credit repair organizations, and instead provides that “[N]o person may … make any statement, or counsel or advise any consumer to make any statement, which is untrue or misleading … with respect to any consumer’s credit worthiness, credit standing, or credit capacity….” 15 U.S.C. § 1679b(a). Relying on case law in the Northern District of Illinois, the court held that “even where a plaintiff cannot prove that the defendant is a credit repair organization within the meaning of section 1679a(3)(A) of the CROA, the plaintiff potentially can nevertheless state a claim … under section 1679b of the CROA.” The defendant’s second argument was more persuasive. The defendants argued that the CROA claim must be dismissed because Plaintiffs have effectively alleged that that the defendant loan brokers violated CROA when they made untrue or misleading statements in the loan application, and then gave those statements to itself to process the loan. They said “it is inconsistent with a logical reading of the statute” that a person can be guilty of violating the statute for making a false representation to itself. The court agreed relying on the plain language of the statute that prohibits a person from making false representations to _another _about a consumer’s creditworthiness or capacity. The court said it was “unwilling to establish such a novel precedent”.

Iowa Appellate Court rules that the failure to comply with contractually-incorporated HUD regulations could be raised by the borrower defensively, but not offensively.

The defendants in ABN AMRO Mortg. Group, Inc. v. Tullar 06-0824 (Iowa App., Apr. 22, 2009), argued that the lender was not contractually authorized to accelerate the debt and foreclose upon the mortgage because the parties’ agreements expressly incorporated HUD regulations, which prohibited foreclosure unless “at least three full monthly installments due under the mortgage are unpaid after application of any partial payments that may have been accepted but not yet applied to the mortgage account.” 24 C.F.R. § 203.606(a). Defendant answered that the HUD regulations do not create a private right of action for a mortgagor, because they govern the relationship between the mortgagee and the federal government, not the relationship between the mortgagee and the mortgagor. The court found this answer “too simplistic”. The mortgagee, it reasoned, contracted with the mortgagor to be bound by those regulations. In other words, the parties agreed that HUD regulations would govern their conduct vis-à-vis each other. The Iowa Appellate Court adopted the reasoning in used in Wells Fargo Home Mortgage, Inc. v. Neal 398 Md. 705, 922 A.2d 538 (Md. 2007) that the failure to comply with contractually-incorporated HUD regulations could be raised by the borrower defensively, but not offensively. At the time the foreclosure was commenced there were seven payments due. After resolving a factual dispute over whether the defendant complied with 24 C.F.R. § 203.606, in returning in partial payments that the lender complied with the requirement set forth in 24 C.F.R. § 203.606, that “at least three full monthly installments due under the mortgage [were] unpaid after application of any partial payments that may have been accepted but not yet applied to the mortgage account.”