Seventh Circuit Court of Appeals Finds Servicer Did Not Violate RESPA

The U.S. Court of Appeals for the Seventh Circuit Court recently affirmed a lower court summary judgment ruling in favor of a mortgage servicer that it complied with its RESPA obligations to provide borrowers with correct mortgage amount and account information.

The borrowers changed homeowner’s insurance carriers and failed to inform their mortgage servicer, which learned of the change independently and paid the correct insurer from the borrower’s escrow fund. Borrowers were notified they would receive a refund check from the previous homeowner’s insurer which had been paid before the servicer learned of the change. Borrowers were also directed to use the refund check to replenish their escrow fund. However, borrowers kept the refund proceeds and failed to pay a new, higher monthly mortgage payment that resulted from the depleted escrow. The servicer provided correct and updated account statements but the borrowers made only partial mortgage payments. Their account fell into arrears and they defaulted.

The borrowers sued and made three allegations about the servicer’s conduct: 1) servicer violated RESPA obligations to provide correct mortgage account information; 2) servicer engaged in a pattern or practice of RESPA violations, causing statutory damages; and 3) servicer violated the common law implied covenant of good faith and fair dealing.

First, as to borrowers’ claim that the servicer’s response to their requests for information about their mortgage violated RESPA, borrowers sent the servicers two “qualified requests for information.” Qualified requests from borrowers require servicers, under RESPA § 2605(e)(2), to promptly respond with appropriate account corrections, a written explanation or clarification explaining why an account is correct, and other account information requested by borrowers. The court noted RESPA does not create a duty to respond to all borrower inquiries, but rather, to respond to written requests alleging an account error or seeking information regarding loan servicing.

Here, the court found borrowers were not harmed by allegedly uncorrected account errors or by the servicer’s failure to comply with RESPA, because there were no account errors in the first place. Borrowers were aware of the reason for the change in their mortgage amount. Default ultimately occurred because they failed to replenish their escrow fund and pay the corrected, increased mortgage payment. The court noted the servicer was technically non-compliant with its RESPA duties because it failed to identify the name of the previous insurer and state why it held one of the borrowers’ partial payments in suspense in its response to borrowers’ written requests for information. However, this issue was moot because the borrower already knew all of that information.

The borrowers’ related claim that the servicer’s RESPA errors caused their marriage to end also failed because, while the court recognized that emotional distress damages are recoverable under RESPA, a marital breakdown allegedly caused by failure to perform RESPA duties was too attenuated.

Second, borrowers’ allegation that the servicer demonstrated a “pattern or practice of noncompliance” with RESPA was based on two previous findings by other district courts that the same servicer was liable for similar RESPA violations. However, the court ruled there was insufficient evidence of a pattern or practice claim because those other cases occurred in different states, separated by several years.

Third, and finally, as to borrowers’ allegation of a breach of the common law covenant of good faith and fair dealing by servicers, the court found borrowers’ mortgage contract permitted the servicer to accept a partial payment that was insufficient to “bring the Loan current.” Thus, payment was not required to be accepted in full satisfaction of the debt borrowers owed, as borrowers claimed. Borrowers’ account was already past due by the time their escrow refund was calculated and they were notified about it; this common law claim failed because the servicer did not behave unreasonably or unfairly.

Weiner Brodsky Kider regularly represents mortgage servicers nationwide in RESPA litigation matters.