The U.S. Court of Appeals for the Fifth Circuit recently affirmed summary judgment in favor of a loan owner and its loan servicer because the servicer gave the required 20-day notice of default under the Texas Property Code prior to initiating foreclosure, and the borrower failed to allege violations of the Texas Debt Collection Act (TDCA).

A copy of the opinion in Diana Rucker v. Bank of America, N.A., et al  is available at: Link to Opinion.

The borrower obtained a $175,000 loan in 2005 in order to purchase her home, signing a note and deed of trust.  The deed of trust was assigned by the original lender to another entity.

The borrower defaulted in 2007 and communicated several times between 2008 and 2012 with the loan owner’s servicer about modifying the loan. On Jan. 15, 2010, the servicer sent the borrower “a notice of default indicating that it planned to accelerate the loan on February 14 if she did not bring it current. She failed to meet the deadline.”

The servicer filed a foreclosure action in August 2012, and the borrower sued the servicer and the loan owner in state court in April 2013.  The loan owner and loan servicer removed the borrower’s action to federal court.  The federal court granted summary judgment in defendants’ favor. The borrower appealed.

On appeal, the borrower argued that the servicer violated section 51.002(d) of the Texas Property Code by supposedly failing to give a notice of default providing at least 20 days to cure before giving the notice of sale.

The Fifth Circuit held that even if this section created a private cause of action, an issue not settled by the Texas Supreme Court, the borrower failed to state a claim because the servicer provided undisputed evidence that it sent the borrower the notice of default giving her more than the required 20 days to cure, and borrower did not allege that the servicer sent her a notice of sale or otherwise attempted to initiate foreclosure before the 20 days expired.

The Court also rejected the borrower’s argument that the servicer’s communications between 2008 and 2012 regarding a potential loan modification violated Sections 392.301(a)(8), 392.303(a)(2), and 392.304(a)(8) of the Texas Debt Collection Act (TDCA).

More specifically, “section 392.301(a)(8) prohibits mortgage servicers from attempting to recover an outstanding loan by ‘threatening to take an action prohibited by law.’ ” The borrower argued that the servicer’s “threatened foreclosure was prohibited by law because [it] had not yet given the statutorily required notice of acceleration,” relying on the Fifth Circuit’s recent ruling in McCaig v. Wells Fargo Bank, N.A., 788 F.3d 462 (5th Cir. 2015), which held that the economic loss rule does not bar TDCA claims and “[i]n determining whether foreclosure would be prohibited by law what matters is whether the mortgagor has a right to foreclose, not whether the debt is considered in default.”

The Fifth Circuit reasoned that the borrower mischaracterized McCaig, “in which we decided that a mortgagor [sic] violated Section 392.301(a)(8) by threatening to foreclose after specifically waiving its right to do so” because in the case at bar, the servicer “never waived its contractual right to foreclose, and [borrower] was in default at all times after October of 2007. Thus, irrespective of any statutory notice requirements, [the servicer] did not violate Section 292.301(a)(8) by threatening to foreclose.”

In addition, “section 392.303(a)(2) prohibits mortgage servicers from using unfair or unconscionable means such as ‘collecting or attempting to collect interest or a charge, fee, or expense incidental to the obligation unless [the fee] is expressly authorized by the agreement creating the obligation or legally chargeable to the consumer.”

The Fifth Circuit held that, although the borrower claimed the servicer charged excessive fees, she was not arguing that the fees were unauthorized under the deed of trust and conceded in response to the motion for summary judgment that the note and deed of trust and note authorized such fees. The Court concluded that section 392.303(a)(2) “prohibits mortgage servicers from attempting to assess fees when such fees are not authorized by the [Deed of Trust]; it does not create a cause of action to challenge assessed fees as unreasonable.”  Accordingly, because the borrower failed to allege a violation of Section 392.303(a)(2), summary judgment on that claim was appropriate.

Moreover, “section 392.304(a)(8) prohibits mortgage servicers from making misrepresentations about a debt. [The borrower] must show [the servicer] made a misrepresentation that led her to be unaware (1) that she had a mortgage debt, (2) of the specific amount she owed, or (3) that she had defaulted.” The borrower argued that the servicer violated this section by allegedly sending her four letters showing different amounts due.

The Court rejected this argument because, “[w]hen examined more closely, the letters are consistent with each other and are not a misrepresentation.” This is because the letters “explicitly state that they are describing two different types of obligations: notices of the entire outstanding obligation and notices of the amount due to bring the loan current. Each category is internally consistent and consistent with the other. [Borrower’s] amount to bring the loan current continued to grow over time because she was not making adequate payments and still occupied the property. The total outstanding obligation grew for the same reason.”

In addition, the Fifth Circuit held that the borrower failed “to establish any of the elements required by Section 392.304(a)(8)” because she never alleged that the servicer “made her unaware of her mortgage debt.” Instead, the borrower kept trying to modify until she was sued, which means she must have been aware of the loan she was trying to modify. She also failed to show how the servicer’s “alleged misrepresentations misled her as to the ‘specific amount’ owed … because each letter specifically identifies the obligation it described and stated it accurately.”

Finally, the Fifth Circuit held that the borrower offered no evidence that the servicer “misrepresented whether her loan was in default” because even if the servicer “repeatedly sent her information about loan modifications, there is no evidence that [it] equivocated on the status of the loan.” Noting that each of the four letters on which this claim was based expressly stated that the loan was in default, the claim under section 392.304(a)(8) also failed.