By, Joe Yenouskas, Partner for Goodwin's Financial Industry and Consumer Financial Services Litigation Practices, and John Raffetto, Associate for Goodwin’s Financial Industry and Consumer Financial Services Litigation Practices
Lenders take a variety of measures to protect the value of their collateral when borrowers default on residential loan payments. Recently, plaintiffs have filed a series of class actions lawsuits across the country targeting these practices. Some judges have dismissed the cases in their entirety, but others have allowed the cases to proceed, and one lender recently reached an eight-figure nationwide settlement. The cases bear close watching.
Financial institutions place significant sums at risk when they lend to homebuyers. Mitigating against the risk of loss becomes critical if a borrower defaults in required monthly payments. To do so, lenders inspect the property to check for occupancy and damage, and obtain opinions about property value broker price opinions (BPOs). Lenders typically charge borrowers for these services as permitted by virtually all security agreements.
Inspections help lenders mitigate against loss by identifying vacancy early so that lenders may take other actions permitted by mortgage agreements (such as securing the property and conducting yard maintenance) to preserve the property’s value. They also assist lenders in complying with municipal regulations that can require that the lender take certain actions in the event of default and vacancy. 1
BPOs are valuations prepared by real estate brokers using comparable sales and visual inspections. They allow lenders to offer loss mitigation alternatives to borrowers in default and, if those efforts fail, to make an informed decision about foreclosure and foreclosure sales. 2
The class actions share similar allegations. Generally, the plaintiffs allege they were charged for inspections and/or BPOs that were unnecessary because, for example, they were performed more frequently than required by investor guidelines, or because the lender knew that the borrower was living in the property (because of contact between the borrower and lender). 3 The cases also typically allege that individual defendants worked together to design and operate a shared electronic system to order and track the inspections and BPOs. The cases are not identical, however: some plaintiffs allege that their monthly statements concealed inspection or BPO fees by using vague terms such as “other fees.” 4 Some plaintiffs claim the fees charged for these activities are marked up about the amount charged by the vendor that performed the inspection or BPO. 5
Courts have treated the cases quite differently. Three dismissed complaints in their entirety. 6 Five have granted partial dismissals, dismissing RICO, fraud, and other claims. 7 One judge allowed all claims to proceed. 8
Class certification has also produced mixed results. Three courts refused to certify the cases as class actions because they held that the legality of any inspection or BPO performed could be performed only by looking at the specific circumstances of each individual borrower’s loan. 9 Two courts certified cases involving Wells Fargo as class actions; Wells later agreed to settle both suits.
The law has yet to reach a final decision on these cases. Lenders can, in the meantime, take several actions to decrease litigation risk: clearly label each inspection and BPO charge on borrowers’ statements rather than use vague descriptions; refrain when possible from marking up costs charged by vendors to perform inspections and BPOs; and keep clear records of when inspections and BPOs are ordered, carried out, paid for, and billed.
1 See, e.g., Boston Mun. Code § 16-52.1, 52.4, and 52.5 (requiring lenders to close and secure property, board up entry points, prevent destruction of window frames and doorways, and inspect).
2 Tara Twomey, Deciphering Mortgage Proofs of Claim, Am. Bankr. Inst. J., at 1, 53 (Nov. 2008); Tracy Clark, It Pays to Verify Real Estate Values, Am. Bankr. Inst. J., at 43 (June 2014).
3 See, e.g., Cirino v. Bank of Am., 2014 WL 9894432 (C.D. Cal. Oct. 1, 2014) and Hill v. Nationstar Mtge. LLC, 2015 WL 4478061, at *1 (S.D. Fla. July 6, 2015).
4 Young v. Wells Fargo & Co., 671 F.Supp.2d 1006, 1013 (S.D. Iowa 2009).
5 Bias v. Wells Fargo & Co., 942 F.Supp.2d 915, 924 (N.D. Cal. 2013).
6 Hill, 2015 WL 4478061, at *3; Cirino, 2014 WL 9894432 and 2015 WL 3669078; and Vega v. Ocwen Fin. Corp., 2015 WL 1383241 (C.D. Cal. Mar. 25, 2015) and 2015 WL 3441930 (C.D. Cal. May 28, 2015).
7 Giotta v. Ocwen Fin. Corp., 2015 WL 8527520 (N.D. Cal. Dec. 11, 2015); Alhassid v. Bank of Am., N.A., 60 F.Supp.3d 1302 (S.D. Fla. 2014); Stitt v. Citibank, 942 F.Supp.2d 944, 948 (2013) and 2015 WL 75237 (N.D. Cal. Jan. 6, 2015); Ellis v. J.P. Morgan Chase & Co., 950 F.Supp.2d 1062 (2013) and 2015 WL 78190 (N.D. Cal. Jan. 6, 2015); Young v. Wells Fargo & Co., 671 F. Supp. 2d 1006 (S.D. Iowa 2009).
8 Bias, 942 F.Supp.2d at 944.
9 Stitt v. Citibank, 2015 WL 9177662, *5; Ellis v. J.P. Morgan Chase, 2015 WL 9178076, *6; Alhassid v. Bank of Am., N.A., 307 F.R.D. 684, 695 (S.D. Fla. 2015).