RESPA is a Shield, Not a Sword

April 29, 2019

Authored by: Jim Goldberg

In a case of first impression, the Fifth Circuit held that a defendant is not required to plead as an affirmative defense under the Real Estate Settlement Procedures Act that it had complied with Section 1024.41 of the Code of Federal Regulations by responding properly to a borrower’s loss mitigation application. Germain v. US Bank National Association, — F. 3d — (2019 WL 146705, April 3, 2019). It affirmed the dismissal of the borrower’s RESPA claim on a summary judgment motion, based on the following facts.

Image by Nadine Doerlé from Pixabay

After repeated defaults beginning in 2009, the borrower Plaintiff filed three or four loss mitigation applications, asking for loan modifications in 2012, 2013 and 2014, in addition to filing bankruptcy in 2013. Each time, the loan servicer responded to the application properly. When the lender accelerated the loan and scheduled it for foreclosure in 2015, Plaintiff filed a lawsuit. It alleged the Defendants violated RESPA by failing to comply with Section 1024.41(d). That regulation section requires that a servicer who denies a loss mitigation application must notify the applicant of the reason he was denied any trial or permanent loan application option available pursuant to the regulation.

In their Answer to the complaint, the Defendants denied the allegation that they had failed to comply with Section 1024.41(d). The unstated basis for the Answer’s denial was that the loan servicer had complied Section 1024.41(i), which states: “A servicer is only required to comply with the requirements of this section for a single complete loss mitigation application for a borrower’s mortgage loan account.” The Court of Appeals ruled that the denial, without the detail, was sufficient, and affirmed the district court’s determination that the Defendants were not required to plead Section 1024.41(i) as an affirmative defense.

The Court of Appeals also ruled that under Section 1024.41, which became effective January 10, 2014, “if the servicer complied with the requirements of the provision prior to the effective date, that compliance must be credited to the servicer because it need only comply with such a requirement once. *** The apparent purpose of the regulation is not to make already compliant servicers repeat their compliance actions, but rather to bring noncompliant servicers into compliance.”

Finally, the Court of Appeals concluded its opinion by castigating Plaintiff and his counsel: “With the help of cunning counsel, Germain used the shield of RESPA … and various state and federal laws as a sword to avoid (or at least minimize) his mortgage payments while continuing the decade-long occupancy of his encumbered house. Today’s termination of Germain’s abuse of the system is long overdue.” How many times have defense counsel yearned to hear that conclusion!