In a case of first impression, the U.S. Court of Appeals for the Fifth Circuit recently held that a lender was not vicariously liable for a loan servicer’s alleged violation of the federal Real Estate Settlement Procedures Act holding that (a) the borrower failed to plead an agency relationship, “an essential element of a vicarious liability claim; and (b) even if an agency relationship existed, the lender could not be vicariously liable as a matter of law for the servicer’s alleged failure to comply with RESPA.

A copy of the opinion in Christiana Trust v. Riddle is available at: Link to Opinion.

The borrower took out a home equity loan in December 2006 for $127,000 secured by a deed of trust. In September 2012, the mortgagee sent the borrower a letter informing her that a loan servicer would begin servicing the loan, which includes sending monthly statements and collecting payments as well as “maintaining records of payments and balances.”

In 2015, the loan was assigned to another mortgagee and shortly thereafter the assignee notified the borrower that a successor servicer would take over servicing the loan.

The borrower failed to pay as promised and the current mortgagee sued to foreclose in October 2016. The borrower filed a counterclaim against the plaintiff mortgagee along with a third-party complaint against the two loan servicers and the original lender.

The original lender moved to dismiss for failure to state a claim under Rule 12(b)(6). The borrower then filed an amended complaint and response in opposition to the motion to dismiss.

The original lender moved to dismiss the amended third-party complaint and in her response, the borrower “clarified her RESPA theory against [the original lender] by stating that the first servicer was the bank’s servicing agent and thus the bank was vicariously liable for the servicer’s RESPA violations.

The trial court granted the original lender’s motion to dismiss with prejudice. The borrower moved for reconsideration, which was denied, and she appealed.

On appeal, the Fifth Circuit began by discussing the borrower’s claim that the original lender was vicariously liable for its servicer’s alleged violation of 12 C.F.R. § 1024.41(c)(1).

As you may recall, this “regulation imposes duties on servicers who ‘receive a complete loss mitigation application more than 37 days before a foreclosure sale.’ … When a servicer receives such an application, the servicer must—within thirty days of receiving the application—‘evaluate the borrower for all loss mitigation options available to the borrower’ and ‘provide the borrower with a notice … stating the servicer’s determination of which loss mitigation options, if any, it will offer the borrower[.]’”

The borrower alleged in her amended counterclaim and third-party complaint that both loan servicers “received timely loss-mitigation applications but failed to consider them and notify [her] of her loss-mitigation options.”

The Fifth Circuit noted that “[n]oticeably absent from this part of the pleading is any reference to [the original lender].” It then reasoned that although the amended third-party complaint “does reference vicarious liability principals generally[,] … [the borrower’s] … vicarious RESPA liability theory requires pleading facts that suggest an agency relationship between [the original lender] and either [of the two servicers].”

“To determine whether an agency relationship exists, the Supreme Court looks to the Restatement of Agency, which requires both the principal’s control over the agent and both parties’ consent to the agent’s acting on the principal’s behalf.”

The “amended third-party complaint alleges no such facts. … Without facts suggesting an agency relationship, even if everything [the borrower] alleges in her complaint is true, her complaint does not ‘state a [RESPA] claim’ against [the original lender] at all—let alone one that is ‘plausible on its face.” Accordingly, the Fifth Circuit affirmed the trial court’s dismissal on this basis.

The Court went on to explain, however, that “[e]ven if [the borrower] had pleaded facts suggesting such a relationship, we hold in the alternative that the district court appropriately dismissed her RESPA claim for another reason: [the original lender], as a matter of law, is not vicariously liable for the alleged RESPA violations of its servicers. This is an issue of first impression in our circuit, and we are apparently the first circuit court to address it.”

The Fifth Circuit reasoned that “[b]y its plain terms, the regulation at issue here imposes duties only on servicers. … A loan servicer’s obligation to follow this regulation derives from RESPA itself, which also confines this obligation to servicers alone.”

In addition, “RESPA’s answer on the ultimate question of § 2605 liability is similarly limited. The statute prescribes that ‘[w]hoever fails to comply with any provision of this section shall be liable to the borrower for each such failure[.]’ 12 U.S.C. § 2605(f). The text squarely settles the issue.”

The Fifth Circuit pointed out that “[w]hen Congress chose to impose RESPA duties more broadly, it did so clearly and explicitly. The statute’s prohibition on kickbacks and unearned fees states that ‘no person’ shall engage in the forbidden conduct. 12 U.S.C. § 2607. … But Congress chose a narrower set of potential defendants for the violations that [the borrower] alleges here. The difference matters.”

The Court held that, “[b]ecause the text of this statute plainly and unambiguously shields [the original lender] from any liability created by the alleged RESPA violations of its loan servicer[,]” the trial court’s dismissal was affirmed “on this basis.”

In addition, because the borrower’s amended counterclaim and third-party complaint did not even mention the original lender, much less allege an agency relationship “that her vicarious liability theory requires[,]” the Fifth Circuit affirmed the dismissal on this basis as well.

Finally, even if the borrower “had pleaded such an agency relationship, the text of the regulation and statute at issue here plainly and unambiguously shields [the original lender] from any liability arising from its loan servicer’s alleged RESPA violations.” The trial court’s dismissal was affirmed in the alternative on this basis as well.