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From Banking and Finance Law Daily, April 21, 2015

Bank subject to borrowers’ RESPA claim on vicarious liability theory

By Thomas G. Wolfe, J.D.

While US Bank, N.A. was not the actual "servicer" of a mortgage loan received from the original lender, the U.S. District Court for the District of New Hampshire ruled that the bank could still be found vicariously liable under the federal Real Estate Settlement Procedures Act for the servicer’s alleged RESPA violations. Although the federal trial court allowed the borrowers’ RESPA claim against US Bank to advance, it dismissed the borrowers’ claim against the bank under state law. The borrowers had alleged that US Bank had breached its duty of good faith and fair dealing under New Hampshire law by pursuing foreclosure on their property while their application for a loan modification was pending (Rouleau v. US Bank, N.A., April 17, 2015, Laplante, J.).

Background. In December 2004, Martin and Lisa Rouleau obtained a mortgage loan on their New Hampshire residence from Chase Manhattan Mortgage Corporation. As part of that transaction, the Rouleaus executed a $259,000 promissory note and mortgage agreement.

The mortgage agreement specified that, in the event of the borrowers’ default on the loan and failure to cure that default, Chase Manhattan had the option of requiring "immediate payment in full of all sums secured by this Security Instrument without further demand" and could invoke the statutory power of sale as well as other legal remedies.

The Rouleaus regularly made their mortgage payments until about 2011—when Lisa Roleau had to leave her job due to illness. Given this loss of additional income, the borrowers then fell behind on their mortgage payments. After unsuccessfully attempting to remedy their default, the Rouleaus contacted JP Morgan Chase Bank, N.A.—the successor to Chase Manhattan—that owned and serviced their mortgage loan. Accordingly, in February 2014, the Rouleaus submitted an application for a loan modification from JP Morgan.

In June 2014, while the loan modification application was still pending, JP Morgan assigned the Rouleaus’ mortgage to US Bank, N.A. In turn, Nationstar Mortgage, LLC began servicing the loan on behalf of US Bank. According to the court’s opinion, while the borrowers "opened an online account with Nationstar in order to improve communication regarding the [loan] modification application," several months later, in November 2014, counsel for US Bank sent the borrowers a notice "informing them that it had scheduled a foreclosure sale of the mortgaged property for the following month."

Procedural context. Shortly before the foreclosure sale was scheduled to take place, the Rouleaus filed an action in New Hampshire state court against JP Morgan, US Bank, and Nationstar. Among other things, the borrowers obtained a temporary restraining order enjoining the foreclosure. At about this same time, the Rouleaus submitted a revised modification application to Nationstar, and Nationstar later indicated that it "had approved them for a trial modification."

Meanwhile, US Bank successfully removed the case from state court to the U.S. District Court for the District of New Hampshire.

Bank’s motion to dismiss. The Rouleaus lodged two claims against US Bank: (i) a state-law claim contending that the bank breached its duty of good faith and fair dealing inherent in the mortgage; and (ii) a federal claim that the bank was vicariously liable for Nationstar’s alleged violations of the regulations implementing RESPA.

In response, US Bank asked the federal trial court to dismiss both claims. In contrast, JP Morgan and Nationstar answered the borrowers’ complaint and did not request dismissal.

State-law claim. As related by the court, the borrowers’ claim under New Hampshire law for US Bank’s alleged breach of the duty of good faith and fair dealing rested on the premise that, by "proceeding with a foreclosure without first considering the Rouleaus’ application for a loan modification," US Bank "evaded the Rouleaus’ justified expectation that [the bank] would refrain from foreclosure while more equitable alternatives remained under consideration."

However, in reviewing New Hampshire case law on the issue, the court emphasized that "the duty of good faith and fair dealing ordinarily does not come into play in disputes where the underlying contract plainly spells out both the rights and duties of the parties and the consequences that will follow from a breach of a specified right." Instead, for the borrowers to adequately state their claim, they would need to supportably allege that the contractual promise by the bank would have "such a degree of discretion that its practical benefit could seemingly be withheld."

Against this backdrop, the court concluded that the mortgage agreement "unambiguously" permitted US Bank to foreclose after the borrowers’ default. While acknowledging that the pertinent clause in the mortgage agreement "does confer some discretion on US Bank in deciding whether or not to proceed with foreclosure, it is not so lacking in clarity as to provide the fodder for a successful claim for breach of the implied duty of good faith and fair dealing."

In dismissing the borrowers’ claim under state law, the court also maintained that, essentially, the Rouleaus had received the benefit of the lender’s performance under the mortgage loan itself; the borrowers could not rely on the pending loan modification to deny the lender "the right to recoup its losses through foreclosure" and require a renegotiation of the terms of the borrowers’ performance under the contract, including a lower interest rate, a different payment schedule, or even a reduction in principal.

RESPA claim. Next, in addressing the Rouleaus’ federal claim, the court observed that RESPA "regulates the conduct of ‘servicers’ of federally related mortgage loans" and that servicers must comply with the regulations promulgated by the Consumer Financial Protection Bureau in general and RESPA’s "loss mitigation" rules in particular.

The court noted that, under certain provisions of RESPA’s implementing regulations (12 CFR §1024.41(f)(2) and §1024.41(g)), when a servicer is reviewing the borrower’s application for a loan modification, the servicer may not, with few exceptions, initiate or conduct a foreclosure sale. In addition, RESPA’s regulations (§1024.38(b)(4)) require a servicer "to whom servicing of a mortgage loan is transferred while a loss mitigation application is pending" to maintain policies and procedures "reasonably designed to ensure that the servicer can … identify necessary documents or information that may not have been transferred by a transferor servicer and obtain such documents from the transferor servicer." Further, a party who fails to comply with those requirements "may be held liable to the borrower."

As highlighted by the court, the borrowers claimed that their loan servicer, Nationstar, "violated some or all of these [RESPA regulatory] requirements." Moreover, while the borrowers conceded that US Bank itself was not a servicer, they asserted that US Bank, "as Nationstar’s principal, may be held vicariously liable for Nationstar’s transgressions."

Although US Bank challenged the Rouleaus’ proposition that "RESPA recognizes vicarious liability of mortgagees for the acts of servicers in their employ," the federal trial court determined that the vicarious liability theory "finds ample support in the law, so US Bank’s argument cannot carry the day."

Consequently, in refusing to dismiss the borrowers’ RESPA claim against US Bank, the court stressed that: (i) U.S. Supreme Court precedent recognizes that "RESPA creates a species of tort liability"; (ii) the court record "fails to reveal any statutory, regulatory, or judicial indication that RESPA does not incorporate traditional tort rules of vicarious liability"; and (iii) US Bank did not dispute that Nationstar was its agent concerning the servicing of the Rouleaus’ mortgage.

The case is No. 14-cv-568-JL (Opinion No. 2015 DNH 084).

Attorneys: Stephanie Anne Bray (New Hampshire Legal Assistance) for Martin and Lisa Rouleau. John S. McNicholas (Korde & Associates PC) for U.S. Bank, N.A. and Nationstar Mortgage, LLC. Nathan Reed Fennessy (Preti Flaherty Beliveau Pachios LLP) for JPMorgan Chase Bank, N.A.

Companies: Chase Manhattan Mortgage Corporation; JP Morgan Chase Bank, N.A.; Nationstar Mortgage, LLC; US Bank, N.A.

MainStory: TopStory CFPB Loans Mortgages NewHampshireNews RESPA StateBankingLaws

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