J. Kirby McDonough is a member of Quarles & Brady's Commercial Litigation Practice Group, working out of the firm's Tampa office. His practice focuses on representing financial institutions and loan servicers in federal and state court matters involving disputes under various consumer protection laws. He recently spoke with DS News about the growing number of “manufactured” lawsuits claiming alleged RESPA violations that have sprung up in the wake of the decline in foreclosures—and how to prepare yourself to deal with these types of lawsuits.
Tell us about the wave of lawsuits around alleged RESPA violations.
As the economy continues to recover and foreclosures are declining, we've seen an uptick in lawsuits brought under the Real Estate Settlement Procedures Act (RESPA), surrounding insufficient responses to a Request for Information (RFI). Under RESPA, a borrower can send a RFI to their mortgage server to obtain information regarding the servicing of their loan. The spirit of this is really to protect the consumer so they can have open access to information regarding their loan. Of course, when there is a regulation promulgated for consumer protection, it can be abused, and we've seen a lot of abuse in the form of manufactured lawsuits and fabricated damages to bring a RESPA action. This is typically how it transpires: Instead of the borrower sending the RFI regarding their loan, borrower's counsel will send the RFI and demand that the response for the request be sent directly to the attorney. They will then immediately file a lawsuit and claim that the servicer provided an insufficient response to their RFI and the borrower has suffered actual damages for the postage and mailing of the RFI in addition to attorneys' fees for reviewing the insufficient response. The monetary damages related to postage are usually nominal; between $3 and $5.
This has become heavily contested throughout the country. There is a gray area when it comes to what actual damages are. Most courts have determined that postage and mailing could be actual damages but it has to derive from a RESPA violation. For instance, it has to be directly related to the insufficient response. The way that the regulation was supposed to work is, if the borrower had a question about their mortgage loan servicing, they could send an RFI to the loan servicer. If the borrower received an insufficient response, and then had to incur the cost of retaining counsel and sending follow-up correspondence, or was actually damaged by the response, they could pursue an action against the servicer for those damages. But what we've seen lately is a manufactured lawsuit where the attorney sends the RFI, the response goes directly to the borrower's attorney, and they're going to review the response irrespective of its sufficiency. The attorney then files a lawsuit based on the response. The problem with this is that the damages haven't incurred as a result of the insufficient response. The attorney was already retained, and the borrower isn't out of pocket any more money for the attorney reviewing the response.
Most courts have found that simply mailing the RFI cannot be actual damages because a RESPA violation has not occurred yet. Therefore, any expenses have not flowed from the RESPA violation. Likewise, courts have found that simply filing a complaint cannot be grounds for damages because then RESPA would essentially have built in damages. Most courts find that something more has to be done on the borrower's end. For instance, sending follow up correspondence regarding an insufficient response. In those instances, the nominal $3 for postage is enough to trigger actual damages.
The real gray area is whether simply reviewing the response can create actual damages. There are two theories. First, if the attorney mailed the RFI, and the attorney demands that the response be sent directly him him/her, then the attorney is going to review the letter irrespective of its sufficiency. Therefore, the damages, as in attorneys fees, did not flow directly from a RESPA violation. On the other side of this argument, borrowers' counsel will argue that the violation occurred the second that the servicer sent the insufficient response. Most courts agree with the former, and that simple review of the letter, without more, cannot create actual damages.
Is this a case of attorneys trying to find a loophole to collect more damages for an alleged RESPA violation?
I don't know that it's necessarily a loophole. There are plenty of good attorneys out there that are representing their clients and trying to legitimately find out information regarding the servicing of a loan. But you have a lot of attorneys doing what is right and you have a few bad apples that have capitalized on RESPA lawsuits and they are filing hundreds of these lawsuits throughout the country. Significantly, it doesn't appear that these bad apples are even interested in protecting their clients, because we are seeing a lot of form RFIs that are attached to the complaint. It's one thing to see form complaints throughout the country--there is no reason to reinvent the wheel on statutory violations. But a form RFI is particularly interesting because the questions related to each individual mortgage loan are not going to be the same. When you start seeing form RFIs coming in from the same attorneys, you should probably be suspicious and say look, are they really looking out for the interest of their client. If you delve in deeper and look at the RFI, a lot of times the requests will actually fall outside of the scope of RESPA.
There are certain things that servicers don't have to respond to. For example, if it's a vague or ambiguous request or if it has nothing to do with the servicing of the loan or if it's burdensome. You have 30 days to respond to an RFI. So if they're asking for every single document that has ever originated from this file, that is going to be tough to provide within a 30-day period. Moreover, you have to ask what the borrower really needs out of the request.
So for the few bad apples, yes these lawsuits are designed to create damages. The driving force behind these claims is the attorney fees provision. Most borrowers that file a claim are in default and are represented by counsel for another purpose such as loan modification or foreclosure defense. A lot of times they'll file these in small claims courts or county courts and they're just hoping that the servicer will settle. There have been a few mortgage servicers out there that have fought these and have removed them to federal court, because it is a federal statute and you have the ability to do that. They have started taking these attorneys to the mat, because it's one thing to settle for $2,500 or $3,500 here and there, but if your company gets 100 of these, it really starts to add up, and sometimes it's worth the fight to set good legal authority so that you don't have to worry about these in the future. You also don't wont to be perceived as a pushover or settlement mill. Trust me, the borrower's counsel knows every servicer that will roll over for nominal settlement. This has to effect their decision of whether or not to file the lawsuit.
What is the defense against this, and what should people look out for?
Servicers need to set up regulatory protection. If you get an RFI, you have five days to acknowledge it. Most servicers have a regulatory department that this goes through. You then have 30 days to gather the necessary information and provide a response. As explained earlier, there are exemptions to RFIs and the request has to be within the scope of RESPA. There's no way to prevent the manufactured lawsuit, because they are designed to be filed no matter how great your response to the RFI may be. But there are good ways to defend these lawsuits. If you are served with a Complaint, check to see if the borrower is also in foreclosure. I think it is pertinent to know whether the information they are asking for now could have been asked for during discovery in the foreclosure action. More importantly, see if this information was already provided to the borrower in discovery in the foreclosure action. It would be really hard to argue that they needed the information requested. In fact, duplicative requests are exempted from a response.
If you cannot prevail on a motion to dismiss, and you are forced to proceed with litigation, step number one is to depose the borrower as soon as possible and figure out what they are really looking for and why they sent the letter. Find out when they retained the attorney and how much they are paying the attorney. What you'll find out a lot of the time is the borrower has no idea what's in the letter, they have no idea what was in the response to the letter, they have no idea how the response was insufficient, and they've actually spent no additional money paying their attorney. A lot of these borrowers have actually hired their attorney for foreclosure defense and/or loan modification purposes and they are paying a monthly flat fee which never goes up. So they've accrued no actual damages arising from the response to the RFI. In many cases, you'll find that this was the attorney's idea to send the RFI, and the borrower simply cannot explain how the response was insufficient.