Luke Sosnicki is a Senior Counsel in the Financial Industry Group in Dykema’s Los Angeles office. Mr. Sosnicki has extensive experience defending banks and mortgage servicers in individual and class action lawsuits across the country. Luke recently spoke with DS News about RESPA’s new loss mitigation rules implemented by the Consumer Financial Protection Bureau in January 2014 and resulting litigation around those rules.
Have the new rules resulted in suits already?
Yes, they've resulted in some suits, but we haven't seen many class-action suits based on these rules yet. At least in California, that may be because there has been a general reluctance on the part of the plaintiffs' attorneys to be in federal court. In California, there's an analogous state statute called the California Homeowners' Bill of Rights. Like RESPA's new loss mitigation rules, the Homeowners' Bill of Rights includes timelines for basic loss mitigation procedures and governs what servicers must do when they receive an application for a loan modification, including putting the foreclosure process on hold while the application is reviewed.
The Homeowners' Bill of Rights pre-dates RESPA’s rules, and there has been a tremendous amount of litigation about the California version. I think, at least for California, that's currently the low-hanging fruit. The moment you add a RESPA claim, you have federal subject matter jurisdiction. Then you're in front of federal judges, where a lot of plaintiffs’ lawyers have found less success, and where delaying foreclosures is more difficult because the cases generally move faster than in most California state courts.
Do you see more plaintiffs willing to bring federal claims in the future, or do you think they're going to keep pursuing state claims?
The Homeowners' Bill of Rights is specific to California. Most non-judicial foreclosure states do not have state-level loss mitigation rules. What the CFPB accomplished with RESPA’s new loss mitigation rules is to nationalize what California and a few other states have already been doing.
I'm not sure whether there is going to be a shift to federal causes of action in California where there is a state law that allows folks to stay in state court. But I do think eventually plaintiffs in other states are going to catch on. Right now, the wave of foreclosure activity in general is subsiding, so we'll have to see if the plaintiffs' attorneys still think this is going to be a lucrative area for them. But in states where foreclosure activity remains high, I do think we are going to see more claims based on these rules appearing in complaints. The rules became effective just last year in January 2014. In the grand scheme of things, a year isn't a very long time, and it often takes longer than that for litigation based on new statutes to truly make an impact.
Are there any of the new loss mitigation rules that plaintiffs are suing over more than others?
I would say that dual tracking is still the most commonly-litigated claim. Dual tracking is proceeding with a foreclosure while the borrower is simultaneously pursuing loss mitigation. Under both the new federal rules and the California analog, servicers are not supposed to do it. I think part of the reason why that it's the most litigated claim is because it's fairly easy to plead.
What are some possible ways to defend against suits over the new loss mitigation rules?
Attacking the pleadings remains as viable defense. Both the federal loss mitigation rules and the Homeowners' Bill of Rights, for example, require a “complete” modification application to have been submitted before the prohibition on dual-tracking is triggered. Many courts have required plaintiffs to plead more than just stating the word “complete,” and have dismissed insufficiently-pleaded complaints.
As a more generally-applicable defense, and especially in the class-action context, there is also an interesting case pending before the Supreme Court, Spokeo Inc. v. Robins, that defendants should carefully follow. The Court just accepted the petition for cert on April 27. They key issue in the case is whether there is Article III standing to sue in federal court where the plaintiff alleges a violation of a statute but no actual harm.
There are numerous statutes applicable to the operations of banks and financial services companies that allow plaintiffs to recover statutory damages where there is no showing of any actual damage to the plaintiff. If the plaintiff proves a statutory violation, that alone is sufficient to impose some kind of statutory penalty. But this is seemingly at odds with the Article III standing is the requirement to get a plaintiff into federal court. To get your case to federal court, you have to show that you have been injured and the injury is redressable by a court ruling. So, the question for the Supreme Court in Spokeo is, how do you reconcile a statute that allows a borrower to sue and recover a penalty for a statutory violation without having to show actual harm with the Article III standard that requires you to show injury-in-fact to even be in federal court?
How do you think that can be reconciled?
I’m not sure it can be. The section that allows borrowers to bring lawsuits for a violation of RESPA’s loss mitigation rules allows for statutory damages, apart from actual damages, where there is a “pattern or practice of non-compliance.” But without actual harm to a borrower, that would not necessarily get a plaintiff Article III standing to sue. For example, if a borrower submits a loan modification application that is not considered in 30 days, but is considered in 35 days instead, that might be a technical violation, but would not typically result in actual harm. If the Supreme Court rules in Spokeo that a bare violation of a statute is not sufficient to confer Article III standing to sue, a defendant could well prevail in a class-action suit alleging federal loss mitigation-rule-violations simply on standing grounds.
The Spokeo decision may be a powerful tool in getting these types of class-action suits dismissed because plaintiffs are going to have a tough time showing actual harm for a lot of these technical violations. And if they can't show actual harm, the courts may well rule that they don't have standing to bring the case to federal court in the first place.