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In Germain v. US Bank National Association, --- F.3d ---, 2019 WL 1467053 (5th Cir. Apr. 3, 2019), the Fifth Circuit resolved two issues of first impression that will have a significant impact on mortgage servicers defending claims asserted under the Real Estate Settlement Procedures Act (“RESPA”). The Court first held that a mortgage servicer need not plead repeated compliance with RESPA as an affirmative defense to a borrower’s suit alleging RESPA violations. And, because the 2014 regulations only require compliance once, the Court also held that a servicer’s pre-2014 conduct can be used to establish compliance with regulatory requirements. In rejecting the borrower’s arguments to reverse a take-nothing summary judgment, the Court issued a warning that should be considered by any borrower who might be tempted to use federal or state laws to avoid mortgage payments or delay foreclosure.
Background. Appellant Michael Germain obtained a 2005 mortgage but has been in and out of default since 2009. From 2012 to 2014, Germain submitted four applications seeking loss mitigation options from his mortgage servicer, Ocwen Loan Servicing, LLC. Ocwen responded to each application, but Germain rejected all loss mitigation options offered and had not made a mortgage payment since 2014.
On January 10, 2014, which was shortly before Germain submitted his third loss mitigation application, regulations describing procedures that mortgage servicers must follow when processing loss mitigation applications took effect. See 12 C.F.R. § 1024.41. Those regulations require a mortgage servicer who receives a complete loss mitigation application at least 37 days before a foreclosure sale to “(1) ‘[e]valuate the borrower for all loss mitigation options available to the borrower’ and (2) ‘[p]rovide the borrower with a notice in writing stating the servicer’s determination of which loss mitigation options, if any, it will offer to the borrower on behalf of the owner or assignee of the mortgage.’” Germain, 2019 WL 1467053, at *2 (quoting 12 C.F.R. § 1024.41(c)(1)). However, a servicer need not comply with those requirements repeatedly; instead, “[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.” 12 C.F.R. § 1024.41(i).
In 2015, Ocwen accelerated Germain’s loan and scheduled the property for foreclosure. To avoid foreclosure, Germain filed the underlying action alleging claims for violations of RESPA, violations of the Texas Debt Collection Act, promissory estoppel, and declaratory judgment. The district court disposed of all claims by granting a take-nothing summary judgment in Ocwen’s favor.
Key Holdings. The Fifth Circuit’s opinion affirming the judgment below includes two key holdings on matters of first impression that may be significant to mortgage servicers defending RESPA claims:
§ 1024.41(i) is not an affirmative defense. Germain first challenged the district court’s holding that Ocwen was not required to plead section 1024.41(i) as an affirmative defense to Germain’s RESPA claim. However, after denying Germain’s allegation that it did not comply with § 1024.41, Ocwen invoked § 1024.41(i) to support an argument that it complied multiple times. Because “[t]hat is a denial or direct contradiction of Germain’s claim,” the Fifth Circuit held that Ocwen was not required to plead § 1024.41(i) as an affirmative defense. Id. at *3.
§ 1024.41 is not retroactive, but a servicer who complied with requirements before 2014 is not required to comply again later. Germain also argued that the district court erred by applying § 1024.41 “retroactively.” After noting that “[t]he word retroactive does not appear in the district court’s opinion,” id. at *3 n.20, the Fifth Circuit, which had not previously addressed the retroactivity of § 1024.41, agreed with the Sixth Circuit’s holding that the regulation “is not retroactive” and, therefore, “does not require a servicer to have complied with its requirements in response to a loss mitigation application prior to its effective date.” Id. at *4. Nevertheless, if a servicer did comply with the requirements in responding to a loss mitigation application submitted before the regulation took effect, “that compliance must be credited to the servicer because it need only comply with such a requirement once.” Id. Simply put, repeated compliance is neither required by the regulation nor necessary to protect borrowers or fulfill the regulation’s apparent purpose.
Potential Impact. RESPA regulations impose a number of technical requirements on mortgage servicers, but the Fifth Circuit’s opinion in Germain show that the Court is not going to permit borrowers to use hyper-technical claims to avoid mortgage payments, delay foreclosure, or prolong litigation. The regulations are intended to be a shield to protect borrowers, not a sword to impose liability on mortgage servicers who initiate foreclosure proceedings against borrowers who appear more intent on gaming the system than paying their mortgages.