The U.S. Court of Appeals for the Eleventh Circuit recently held that a borrower properly pleaded a “notice of error” claim under the federal Real Estate Settlement Procedures Act (RESPA), reversing the lower court’s grant of the servicer’s motion to dismiss.

A copy of the opinion is available at:  Link to Opinion.

In 2006, a borrower refinanced her mortgage with a lender, with monthly payments of $998.68. Several years later, servicing of the loan was transferred.  The borrower’s payments allegedly increased by about $100 after the transfer. The borrower claimed that she repeatedly contacted the servicer seeking an explanation but did not receive one.

In 2013, the borrower refinanced her mortgage a second time with a second lender, which ended the servicer’s duties.

On June 17, 2014, the borrower allegedly sent another letter to the servicer, again pointing out the increase in payments, as well as her suspicions that the servicer mistakenly charged property taxes or had miscalculated the loan amortization schedule. The borrower supposedly requested an investigation, a detailed explanation, certain account information, and a refund if appropriate. The borrower also alleged that she attached several loan documents in support of the letter.

On June 26, 2014, the servicer responded to the borrower’s letter in which it denied any error, and supposedly concluded that the loan documents complied with all state and federal guidelines that regulate them. The servicer allegedly included various documents, many that the borrower did not request, yet the letter said nothing about the substantive content of the alleged documents and supposedly gave no explanation for the borrower’s issues.

In July 2014, the borrower filed suit alleging that the servicer violated RESPA by allegedly failing to reasonably investigate the error she alleged she pointed out in her account, by allegedly failing to adequately respond to her notice of error, and by allegedly failing to refund overpayments. The servicer moved to dismiss the case for failure to state a claim, asserting that it had satisfied its obligations under RESPA and that the borrower had not adequately pleaded damages.

The case went before a magistrate judge who recommended granting the defendant’s motion to dismiss. The magistrate judge reasoned that the defendant complied with RESPA, referencing its explanation that documents related to the loan were reviewed. Yet, these documents were found nowhere in the record.

In addition, the magistrate judge found that the borrower had not pleaded actual damages under RESPA because the overpayments occurred before she wrote to the defendant. The overpayments were therefore a breach of contract, not a RESPA violation. Further, the magistrate judge also held “that no statutory ‘pattern or practice’ damages could accrue without actual damages.”

The District Court adopted the magistrate judge’s report, over objection from the borrower, and dismissed the complaint without prejudice. The borrower timely appealed.

As you may recall, RESPA’s servicing provision requires servicers among other things to respond to notices of error by fixing any error, crediting the borrower’s account, and notifying the borrower; or by concluding that there is no error based on an investigation and then explaining that conclusion in writing to the borrower.

RESPA makes violators liable to individual borrowers for “(A) any actual damages to the borrower as a result of the failure; and (B) any additional damages, as the court may allow, in the case of a pattern or practice of noncompliance with the requirements of this section.”  See 12 U.S.C. § 2605(f)(1).

Also, in 2013, the Consumer Financial Protection Bureau (CFPB) promulgated new regulations that clarified servicers’ obligations after receiving a notice of error.  Under these rules, and in relevant part, a servicer must respond to a notice by “(B) Conducting a reasonable investigation and providing the borrower with a written notification that includes a statement that the servicer has determined that no error occurred, a statement of the reason or reasons for this determination, a statement of the borrower’s right to request documents relied upon by the servicer in reaching its determination, information regarding how the borrower can request such documents, and contact information, including a telephone number, for further assistance.” See 12 C.F.R. §1024.35(e)(1)(i).

The Appellate Court considered two aspects of the borrower’s claim. First, whether she stated a RESPA violation, and second, whether she alleged any actual damages related to that violation.

The borrower alleged that the servicer violated RESPA because it supposedly failed to provide “any explanation” for its conclusion; supposedly failed to provide “an explanation of whether it was charging . . . property taxes”; supposedly failed to provide “an explanation of how payments were calculated and which amortization schedule was used”; and supposedly failed to “conduct any reasonable investigation.”

At oral argument, the servicer acknowledged that its letter did not explain to the borrower why the two errors she suspected were not present, and why the payment had increased.

Accordingly, the Eleventh Circuit held that the borrower had in fact stated a RESPA violation in her complaint.

The Court reasoned that if servicers want to try to shelter behind their RESPA response letters, they must provide a more comprehensive, supported explanation of their findings.

In addition, as a procedural matter, servicers must introduce the supporting attachments into the record and convert their motions to dismiss into motions for summary judgment.

The Eleventh Circuit also held that the borrower sufficiently pleaded actual damages.

According to the Court, the language in RESPA (“as a result of”) suggests there must be a causal link between the alleged violation and the damages.

Here, the Court noted that the borrower alleged she sustained actual damages when the servicer failed to refund her mortgage overpayments. The Eleventh Circuit found that there was a sufficient causal link to the servicer’s alleged violation. The Court noted that, had the servicer followed its statutory duties, the borrower would have received a refund.

The servicer argued that the borrower’s actual damages argument failed as the borrower’s damages occurred before she sent the notice of error.

However, the Eleventh Circuit held that this argument ignores the fact that the notice of error triggers RESPA obligations with respect to past error.  In addition, the Court noted that the defendant’s logic was flawed because a servicer notified of an account error could always avoid RESPA liability just by claiming it thought there was no error and correcting the error going forward.

The Eleventh Circuit also discussed RESPA liability for “pattern or practice of noncompliance” allegations.

As such damages are not clearly defined by the Court’s precedent, the Eleventh Circuit looked to other circuits to determine how many violations create a pattern or practice of non-compliance.

Of note, the U.S. District Court for the Eastern District of New York found that two violations of RESPA are insufficient to support a claim for statutory damages, but the U.S. District Court for the Northern District of Illinois found that five RESPA violations were adequate to plead statutory damages. SeeKapsis v. Am. Home Mortg. Servicing Inc., 923 F. Supp. 2d 430, 445 (E.D.N.Y. 2013); Ploog v. HomeSide Lending, Inc., 209 F. Supp. 2d 863, 868–69 (N.D. Ill. 2002).

Here, the borrower alleged a total of five RESPA violations, and the Court did not decide the minimum number of similar violations that must be pleaded for RESPA “pattern or practice of noncompliance” liability.

The servicer argued that the borrower did not disclose the specific facts about the other alleged borrower who supposedly had similar issues with the servicer nor did she disclose the nature of their requests.

However, the Court disagreed with the servicer because at the motion to dismiss stage the plaintiff need only plead enough facts to state a claim to relief that is plausible on its face.  Accordingly, the Eleventh Circuit found that the borrower had plausibly alleged a pattern or practice of noncompliance with the servicing requirements of REPSA.

The Eleventh Circuit held that the borrower adequately pleaded a REPSA violation, as well as a basis for actual and statutory damages, and accordingly reversed and remanded the matter to the District Court.