The U.S. Court of Appeals for the Seventh Circuit recently held that a mortgage servicer’s response to a borrower’s written request for information complied with requirements of the federal Real Estate Settlement Procedures Act (RESPA) and, to the extent any information was missing, the borrower suffered no actual damages as a result.

In so ruling, the Seventh Circuit rejected the borrowers’ pattern or practice argument under RESPA, based on two district court cases in 2012 and 2014 holding the servicer liable for RESPA violations, because “[t]wo examples of similar behavior — in different states, separated by a handful of years, and with no evidence of coordination — isn’t enough to support recovery of statutory damages.”

A copy of the opinion in Perron v. J.P. Morgan Chase Bank, N.A. is available at: Link to Opinion.

The borrowers switched insurance carriers, but failed to inform the mortgage servicer. This resulted in the servicer paying the wrong homeowner’s insurer using money from the loan’s escrow account.

Upon learning of the error, the servicer paid the correct insurer and told the borrowers that they would receive a refund check from their former insurer, and that they needed to send the refund check back to the servicer to replenish the escrow account.

Instead of doing as instructed, the borrowers kept the refund from the insurer and did not replenish their escrow account. This resulted in the servicer adjusting their monthly payment upward to make up for the shortfall.

The borrowers refused to pay the increased amount, even though the difference was only $66.86 per month, and the loan went into default.

The borrowers sent the servicer two letters requesting information under RESPA and demanding that the servicer replenish the escrow account because it erroneously paid the wrong insurance carrier. The servicer responded by providing a complete account history, which included a detailed escrow statement.

The borrowers then sued the servicer for allegedly violating RESPA because the servicer’s response to their request for information was supposedly inadequate and for supposedly breaching the common law implied covenant of good faith and fair dealing. The borrowers sought more than $300,000 in damages and blamed the collapse of their marriage on the servicer.

The district court entered summary judgment in the servicer’s favor, holding that there was no evidence that the servicer violated either its statutory obligations under RESPA or the common-law covenant of good faith and fair dealing. The borrowers appealed.

On appeal, the Seventh Circuit first addressed the common law claim, explaining that “Indiana does not recognize an implied covenant of good faith and fair dealing in every contractual setting; instead, the state courts have recognized an implied covenant of good faith in the context of employment contracts, insurance contracts, and certain other limited circumstances—for example, when one counterparty stands in a fiduciary, superior, or special relationship to the other.”

Because the district court assumed without deciding that the duty of good faith applied in the context of mortgage servicing, the Appellate Court adopted the same assumption. The Seventh Circuit explained that “[a] party violates the implied duty of good faith and fair dealing when, though not breaching the express terms of the contract, he nonetheless behaves unreasonably or unfairly.”

The borrowers argued that the servicer breached this duty by holding a partial payment they made in December 2010 “in suspense.” The Seventh Circuit rejected their argument because the servicer never agreed to accept the partial payment “in full satisfaction” of the December payment that was due, and moreover, the mortgage contained standard language allowing the servicer to accept partial payments without waiving its right to enforce the loan’s terms.

The Seventh Circuit also rejected the borrowers’ argument that the servicer had a duty to apply a 2010 escrow refund toward their December 2010 payment, reasoning that by the time the escrow refund was calculated, the account was already past due, “so even if [the bank] had applied those funds to the account, the late fees would already have accrued.” In addition, the Court noted that the borrowers could have used the escrow refund to pay the balance owed on the December payment, but chose not to do so. The Court concluded that the servicer had no duty to do this for them.

Turning to the RESPA claim, the Seventh Circuit recited that “RESPA requires mortgage servicers to correct account errors and disclose account information when a borrower sends a written request for information.” As you may recall, RESPA provides borrowers with a cause of action if a servicer fails to comply for actual damages resulting from the failure to comply, plus statutory damages of up to $2,000 if the borrower proves that the servicer engaged in a “pattern or practice of noncompliance.” A prevailing borrower is also entitled to recover costs and attorney’s fees.

The Seventh Circuit also explained that a servicer does not have a duty to respond to all inquiries or complaints from borrowers. Instead, RESPA “covers only written requests alleging an account error or seeking information relating to loan servicing.” The statute defines “servicing” as “receiving any periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow accounts …, and making the payments with respect to the amounts received from the borrower as may be required” by the loan documents.

The Court continued that RESPA requires that a servicer that receives a qualified written request take one of three actions: (a) correct the account error; (b) after investigating, provide the borrower with a written explanation or clarification why the account is correct; or (c) provide the information requested to the borrower or explain why it is unavailable.

Here, the Seventh Circuit found that the servicer’s response “almost perfectly” complied with the requirements of RESPA subsection 2605(e)(2) because it provided a complete account history showing all monthly payments, how those payments were applied to principal, interest, and escrow, escrow payments and “a complete escrow accounting.”

The only things missing, the Court noted, were the name of the insurance company that received the $1,422 escrow payment and an explanation of why the December 2010 payment was correctly held in suspense.

The Seventh Circuit held, however, that this missing information had already been provided in earlier correspondence and, accordingly, even if the response “fell slightly short of full compliance as a technical matter,” the borrowers could not show “that they suffered any actual damages ‘as a result of’ any failure to comply with RESPA response duties.”

The Court also addressed the borrowers’ allegation that the servicer’s failure to respond properly caused their marriage to dissolve, finding that while “[e]motional distress damages are recoverable under RESPA, … the breakdown of a marriage is not the type of harm that faithful performance of RESPA duties avoids. This kind of harm is far too attenuated from the alleged violation to cross the proximate-cause threshold.”

The Seventh Circuit held that even though the servicer’s response was technically incomplete, “no reasonable fact finder could conclude that [the borrowers] suffered any actual damages as a result of that shortcoming.”

The Court also found that because the borrowers failed to produce any evidence showing a pattern or practice of noncompliance with RESPA, their claim for statutory damages failed.

The Seventh Circuit rejected the borrowers’ pattern or practice argument, based on two district court cases in 2012 and 2014 holding the servicer liable for RESPA violations, because “[t]wo examples of similar behavior — in different states, separated by a handful of years, and with no evidence of coordination — isn’t enough to support recovery of statutory damages.”

Accordingly, the district court’s summary judgment was affirmed.