Interpreting RESPA’s Regulation X

Editor's Note: This feature originally appeared in the January issue of DS News, out now.

The Real Estate Settlement Procedures Act (Regulation X) was enacted by the Bureau of Consumer of Financial Protection on January 10, 2014, and was designed to protect consumers when they apply for and have mortgage loans.

Its enactment set off a wave of apprehension for mortgage servicers and the attorneys who represent them. Would it open a floodgate of consumer litigation? Would its broad terms provide an unchecked avenue for borrowers to contest mortgage servicing decisions they were unhappy with? Perhaps it would stymie servicers’ ability to quickly and efficiently foreclose? With almost four years of analysis and legal decisions interpreting its purpose, impact, and application, Regulation X has proven to be far less of a sea change than initially feared.

One of the foremost issues courts grappled with in the early days of Regulation X was whether it provided a private right of action for claims alleging violations of provisions other than §1024.41. Such confusion was not entirely unexpected; unlike §1024.41, which expressly provides a private right of action, the other provisions are silent on enforcement. Federal district courts interpreting Regulation X therefore reasonably held that since a private right of action was specifically articulated in §1024.41, the lack of such specific language in the remaining sections must necessarily mean that no such private right existed. Mortgage servicers and attorneys found this analysis critically important—limiting a private right of action to claims arising from §1024.41 would limit potential damage exposure significantly and provide a convenient basis to request dismissal.

However, with time comes clarity, and recent decisions in the Second, Third, Fourth, Seventh, Ninth, and 11th Circuits have evidenced a shifting trend toward applying the Real Estate Settlement Procedures Act’s (RESPA’s) all-encompassing private right of action to all claims brought pursuant to Regulation X—regardless of which provision plaintiffs allege has been violated. For instance, in Lage v. Ocwen Loan Servicing LLC, 839 F.3d 1003, 1007 (11th Cir. 2016), the 11th Circuit affirmatively applied a private right of action to bring claims under §1024.35 in, holding that “[i]f the servicer fails to respond adequately to the borrower’s notice of error, then the borrower has a private right of action to sue the servicer under RESPA.” Servicers should be weary of claiming a lack of private right of action as a defense. Instead, time and resources should be devoted to effectively arguing the Regulation’s terms were substantively complied with in full.

Half of the federal circuits are similarly now in agreement on another issue that caused confusion in the regulation’s early days: whether it could be applied retroactively, and if so, under what terms. The Sixth Circuit issued the first appellate decision interpreting §1024.41 in Campbell v. Nationstar Mortgage, 2015 U.S. App. LEXIS 7675 (Sixth Cir. 2015), where it held that Regulation X could not be applied retroactively if the foreclosure sale was held prior to the regulation’s implementation. However, subsequent federal district court decisions in various circuits parsed the meaning of this decision, extrapolating that when the foreclosure sale was not held until after the regulation was implemented, regardless of when the loss mitigation application was initially submitted, §1024.41 loss mitigation requirements may apply.

Federal courts in the First, Third, Fifth, Ninth, 10th, and 11th Circuits have since agreed that retroactive application of Regulation X is strictly prohibited, even if the loss-mitigation application was submitted before Regulation X’s effective date and the foreclosure sale occurred after such date. As succinctly put by the court in Kawah v. PHH Mortg. Corp., 2016 U.S. Dist. LEXIS 178467 (E.D. Pa. Feb. 2, 2016), “Regulation X neither applies retroactively to claims initiated before RESPA’s effective date nor does it impose obligations on servicers before this date.” Courts have also applied the Bureau of Consumer Financial Protection’s own analysis in determining that Regulation X does not have retroactive effect. As the court in Christenson v. CitiMortgage, Inc., 255 F. Supp. 3d 1099 (D. Colo. June 1, 2017) stated, “numerous courts and the CFPB itself have noted [that] the CFPB’s regulations do not have retroactive enforcement.” Holdings such as this are particularly important in those situations when a loan modification request was submitted prior to the regulation’s enactment, but the foreclosure sale was held months or even years after. Thus, the denial of retroactive applicability essentially provides a de facto safe harbor for servicers in regards to claims originating prior to January 10, 2014.

Federal courts have also concluded that Regulation X and RESPA do not preempt state common-law claims, except in limited circumstances. For instance, Regulation X provides a specific preemption of conflicting state laws about notices and disclosures of transfer of mortgage servicing. Under that provision, a servicer that complies with Regulation X in providing a servicing-transfer notice at the time of application or transfer of servicing of the loan need not comply with state law requiring servicing transfer notice to a borrower. Because the instances in which Regulation X would preempt state law are extremely limited, courts applying the regulation require fact and policy-specific analysis by the party asserting preemption as to why it should be applied. Indeed, in addressing a defendant’s argument that a state law claim was preempted by RESPA, the court in Hartley v. Bank of Am., N.A., 2017 U.S. Dist. LEXIS 10521 (W.D. Wash. Jan. 25, 2017) made clear that the “fact that state and federal statutes touch on the same topic is not enough to warrant a finding of preemption. The intent of Congress and the practical impacts of the state law on the way Congress intended the federal statute to work must be considered when determining the preemptive scope of a federal statute.” Thus, mortgage servicers should be prepared to provide specific and numerous evidentiary and policy arguments to support a preemption defense.

Unfortunately, the question of what constitutes a “reasonable” response to a borrower’s notice of error or request for information pursuant to §1024.35 and §1024.36 remains highly subjective. And why wouldn’t it be? Reasonableness, in general, is a highly fact-specific inquiry that turns on not only the nuances of the issue but also what is considered “normal” in the particular industry and jurisdiction. Mortgage servicers should, therefore, proceed with an abundance of caution when responding to requests—in this instance, from a review of the applicable case law, it appears to be far better to be over inclusive than to risk a court finding that a limited response was unreasonable. Responses to borrower inquiries should indicate what steps were taken to investigate the borrower’s allegation, respond directly to the borrower’s question or concern, and provide accurate and supportable information for the response. Failures to address specific borrower concerns or provide requested documentation such as a payment history have doomed mortgage servicers in courts across the country.

Finally, mortgage servicers can rest easier knowing that courts have strictly construed RESPA and Regulation X’s requirement that borrowers plead actual damages. In fact, decisions in favor of mortgage servicers on this issue have far exceeded those in favor of borrowers.

However, courts have demonstrated a willingness to find borrowers have alleged actual damages where the conduct claimed of was demonstrably related to the claimed injury. In Renfroe v. Nationstar Mortgage, LLC, 822 F.3d 1241, 1244 (11th Cir. 2016), the court found a borrower had properly claimed actual damages when she alleged that despite her request for her servicer to investigate potential mortgage loan overpayments, the servicer failed to conduct a reasonable investigation, causing the borrower to lose out on a refund of those overpaid monies.

Courts across the country have generally done an admirable job interpreting and applying Regulation X, particularly in light of its many subjective points of analysis. While the number of mortgage and loss mitigation-related actions brought by consumers has waned in the years since Regulation X was enacted, there is still a significant cohort of borrowers who are waiting to take their shot at recovery via the regulation. Nevertheless, if servicers remain vigilant and continue to employ best practices in responding to borrower inquiries, they should continue to see litigation success.