Banking and Finance Law Daily Creditor not liable for loan servicers’ RESPA loss-mitigation violations
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Wednesday, January 2, 2019

Creditor not liable for loan servicers’ RESPA loss-mitigation violations

By Richard A. Roth, J.D.

A mortgage loan creditor is not vicariously liable for its loan servicer’s violations of the Real Estate Settlement Procedures Act because the Act explicitly restricts liability to servicers, the U.S. Court of Appeals for the Fifth Circuit has decided. In what it termed a case of first impression in the federal appellate courts, the Fifth Circuit said that a creditor cannot be liable for a loan servicer’s failure to comply with the loss mitigation requirements of RESPA and Reg. X—Real Estate Settlement Procedures (12 CFR Part 1024). The RESPA ruling was given as an alternative to the court’s first choice—that the homeowner failed to describe an agency relationship between the bank and either of the servicers (Christiana Trust v. Riddle, Dec. 21, 2018, Elrod, J.).

Bank of America made a home-equity loan to a homeowner and later gave the servicing rights to Ocwen Loan Servicing. A subsequent assignee of the loan shifted the servicing rights to BSI Financial Services. When the assignee filed a foreclosure suit, alleging that the homeowner had not made her payments, the homeowner filed a third-party complaint against Bank of America and the two servicers claiming that she had filed a loss mitigation application that had not been considered as Reg. X required.

The homeowner’s claims were dismissed by the U.S. district court judge, and she appealed.

No agency relationship. Vicarious liability requires an agency relationship, the appellate court said, and the homeowner’s third-party complaint simply failed to describe such a relationship between Bank of America and either of the two servicers. A person who provides services under a contract is not necessarily an agent of the recipient of those services, the court pointed out. An agent acts under a principal’s control, while a contractor might not, and the homeowner had not claimed the bank had any control over the servicers’ actions.

No vicarious liability. Even if the homeowner had described an agency relationship, RESPA and Reg. X still would have protected the bank from any liability for the servicers’ violations, the court then said. While the statute and the regulation both impose loss-mitigation consideration duties, both explicitly restrict to servicers any liability for failing to carry out those duties.

Both the regulation and the statute place loss-mitigation compliance duties only on servicers, the court pointed out. Reg. X defines a servicer as a person who receives payments from the mortgagor and distributes those funds as required by the loan. The bank did not engage in those activities, so it was not a servicer, the court reasoned.

When Congress intended RESPA to apply more broadly, it used broader language, according to the court. For example, the act said that "no person" could accept kickbacks or unearned fees. However, the loss mitigation duties applied explicitly only to servicers. RESPA’s text "plainly and unambiguously" imposed liability only on servicers and rejected any vicarious liability for creditors, the court decided.

One member of the three-judge panel did not join in the RESPA determination because she felt the failure to describe an agency relationship was adequate to decide the case. However, the opinion added that, in the Fifth Circuit, alternative holdings are not obiter dictum; rather, they are binding precedent.

The case is No. 17-11429.

Attorneys: Mark D. Cronenwett (Mackie Wolf Zientz & Mann PC) and Cody Patrick Peterson (McGlinchey Stafford PLLC) for Christiana Trust. Jack B. Peacock, Jr. (Gagnon Peacock & Vereeke PC) for Mary Sue Riddle.

Companies: Bank of America, N.A.; BSI Financial Services; Ocwen Loan Servicing, LLC; Wilmington Savings Fund Society, FSB

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