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From Banking and Finance Law Daily, June 17, 2013

National Mortgage Servicing Settlement Does Not Preclude Individual Consumer Suits

By Richard A. Roth, J.D.

J.P. Morgan Chase & Co. and two of its subsidiaries have failed to convince a federal district judge that the national mortgage servicing consent order entered by the Office of the Comptroller of the Currency should block a proposed class action by consumers complaining about loan default service charges. The court also rejected claims by the companies (referred to as “Chase,” for simplicity) that the state laws cited in the suit were preempted by the National Bank Act. However, the court did decide that several of the consumers’ specific claims, including racketeering law claims that carried the possibility of treble damages, should be dismissed (Ellis v. J.P. Morgan Chase & Co., June 13, 2013, Rogers, U. S. District Court Judge).

The consumers claimed that Chase charged unnecessary fees and marked up other fees improperly in ways that were unnecessary and that violated the mortgage loan agreements. These practices violated California consumer protection statutes and common law, they said, as well as the federal Racketeer Influenced and Corrupt Organizations Act. The consumers conceded that they were obligated to pay for default -related services, but said they were not obligated to pay for unnecessary services or to pay so much for necessary services that Chase made a profit.

Chase countered principally by attacking the court’s authority to consider the suit.

Effect of mortgage servicing settlement. J.P. Morgan Chase Bank, N.A., was one of the banks covered by the OCC’s 2011 consent order addressing mortgage servicing problems. The consent order imposed several obligations on Chase, including improving its servicing and foreclosure practices and creating a loss mitigation plan. The bank also was required to have an independent consultant review the relevant foreclosures for needed remediation payments; however, that duty later was superseded by an amendment to the order.

The original consent order and the amendment both said that the bank could not require consumers to waive any rights in order to receive payments under the settlement, the court pointed out. However, the bank retained its right to set-offs provided by law.

Under federal law, courts do not have jurisdiction to block or take other actions that affect orders issued by the OCC, the judge said. According to Chase, this meant that there was no jurisdiction over the consumer’s suit because the consumers’ demands would affect the national mortgage servicing consent order.

The judge rejected chase’s argument, citing four reasons:

  1. The problems addressed by the consent order were problems with foreclosures. The consumers raised complaints about default-related charges, not about the bank’s foreclosure practices.
  2. The consumers were not asking the court to review or interfere with the consent order.
  3. The amendment to the consent order, which relieved Chase of the duty to have all files independently reviewed in exchange for making defined payments, made clear that the OCC did not intend consumers to lose their right to sue.
  4. Even if the consent order might have denied jurisdiction, Chase had not demonstrated how the consumers’ suit actually would affect the OCC’s enforcement of the order.

Preemption. Chase also attempted to convince the judge that the National Bank Act preempted the consumers’ claims because the state laws would interfere with the bank’s exercise of its powers under federal law. According to Chase, OCC regulations applied to fee-setting, fee disclosures, and loan origination and processing, and state law could not apply to those activities.

Again, the judge disagreed, at least as far as the claim of fraud in violation of the state consumer protection law. The state law applied generally, did not discriminate against national banks, and did not impose any requirements that conflicted with the NBA, the judge said, and so the law was not preempted. The claim only attacked potentially misleading statements about the validity of the charges. Comparable claims alleging unjust enrichment and common law fraud also survived preemption, the judge decided.

Defects in claims. While Chase could not convince the judge to dismiss the entire suit, it was able to obtain the dismissal of the anti-racketeering law claims.

RICO is violated if a person uses an enterprise to engage in a pattern of racketeering activities, according to the judge. This means that two separate entities must be present—an actor and an enterprise. The judge said that the consumers had failed to describe an enterprise that was separate from the three Chase businesses.

The case number is 12-cv-03897-YGR.

Attorneys: Mark Philip Pifko (Baron & Budd, P.C.) for Diana Ellis. Peter Obstler (Bingham McCutchen LLP) for J.P. Morgan Chase & Co.

Companies: J.P. Morgan Chase & Co.; J.P. Morgan Chase Bank, N.A.; Chase Home Finance LLC

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