About Me

Jonathan Foxx, PhD, MBA is the Chairman & Managing Director of Lenders Compliance Group, the first full-service, mortgage risk management firm in the United States, specializing exclusively in mortgage compliance and offering a full suite of services in residential mortgage banking for banks and non-banks.

Wednesday, July 18, 2018

Dissatisfied Borrower leads to RESPA Litigation

A new client of ours did a thorough investigation of a Qualified Written Request (QWR) but, unfortunately, the borrower was not satisfied with the conclusions. Our client contacted me because of concerns arising out of the Notice of Error (NOE) and Request for Information (RFI) process. After reviewing their response and decision tree, we suggested revisions to their policies and procedures.

The importance of complying with RESPA’s NOE and RFI procedures is fundamental to RESPA compliance. It is not a simple matter of having a dissatisfied borrower on your hands, although that is bad enough. The larger problem is that the borrower may commence litigation, which almost certainly will include a RESPA claim for violations of these procedures. If they don’t already have a claim when they start looking for causes of action, they may test the waters by sending an NOE and/or RFI.

This is a situation of significant exposure to the financial institution. In point of fact, by my count more than 1,100 court decisions filed since August 1, 2013 have involved alleged QWR, NOE, or RFI violations.

Here’s just one of the cases among the hundreds upon hundreds of such actions.

First, let me set the stage. Effective January 10, 2014, the Consumer Financial Protection Bureau (CFPB) reorganized the provisions of Regulation X regarding error resolution and borrower inquiries. Regulation X [12 C.F.R. § 1024.35] addresses NOEs and § 1024.36 covers RFIs. The revised processes subsume the QWR requirements of the RESPA statute, with both sections expanded to include certain written borrower inquiries that are not QWRs.

Section 1024.35 applies to any written NOE from a mortgage loan borrower to the servicer that: (1) asserts an error; (2) includes the name of the borrower; (3) includes information that enables the servicer to identify the borrower’s mortgage loan account; and (4) describes the error the borrower believes occurred.


When a servicer receives an NOE, it is required to acknowledge receipt in writing within 5 business days. In general (with certain exceptions), it then must respond to the NOE within 30 business days by correcting the error and providing written notice of correction or conducting a reasonable investigation and providing a written notification that describes the result of the investigation.

So, having set the stage, let’s look at a particular case involving a borrower who is not satisfied with an explanation.

The case I am choosing is Finster v. U.S. Bank N.A. (11th Cir Jan. 31, 2018).

Finster defaulted on her home mortgage loan. US Bank initiated foreclosure proceedings. Before the sale date, Finster submitted an application for a loan modification. The bank found her eligible, provided she made three timely trial period payments and submitted a loan modification agreement. She made the three payments.

The bank then dismissed the foreclosure action and sent her two copies of a loan modification agreement to execute and return. But Finster did not return the originals, as instructed. Instead, she signed copies of the originals, with images of the “Sign & Date” and “Notarize” stickers copied onto the documents. The bank did not execute and record those documents because they did not satisfy recording requirements.

About a month later, the bank sent Finster’s counsel a second set of documents but did not explain why. The bank claimed it attempted to contact Finster’s counsel to explain, but Finster’s counsel stated that he had no record of the communications. The bank denied the modification because Finster failed to return the second set of documents.

However, Finster continued making payments after the trial period. The bank rejected them because it had denied the modification. The bank instituted a second foreclosure action.

Finster, through counsel, then sent three NOEs. 

The first NOE said the bank had violated Regulation X § 1024.41 by proceeding with foreclosure despite Finster’s performance of the modification and wrongfully terminating the modification without providing her an opportunity to cure. The bank responded by indicating that “no error occurred” and that it had not accepted her package because she had not correctly signed the documents.

The second NOE faulted the bank for failing to timely credit five of Finster’s mortgage payments. The bank again responded that no error had occurred, that it had held four of the payments in escrow while Finster’s account was in loss mitigation review and then applied them to her account once the bank issued a non-approval, and that it had returned the final payment because it was not sufficient to bring her loan current after the modification was rejected.

The third NOE alleged that the bank had wrongly repudiated the modification agreement. Again, the bank responded that no error had occurred and recounted that Finster had failed to return satisfactory documents.

Finster sued the bank for violating RESPA. Partly in response, the bank allowed her to re-execute the modification documents, waived late fees and costs, dismissed the foreclosure action, and brought her loan current under the terms of the original loan modification.

The district court granted summary judgment for the bank and the 11th Circuit affirmed. The bank’s responses to the NOEs had complied with RESPA by providing explanations, even though Finster had found the responses unsatisfactory and unreasonable.

The Court concluded:

“The gist of Finster’s position seems to be that U.S. Bank’s actions were unreasonable. And maybe they were. But unreasonable conduct by a servicer does not necessarily amount to a violation of RESPA or Regulation X, even if their requirements seek to establish a baseline of reasonable conduct in many ways. In this regard, the fact that U.S. Bank later granted Finster the loan modification does not create a genuine issue of material fact as to whether U.S. Bank violated RESPA in responding to Finster’s notices of error. Specifically, it is not ‘significantly probative’ evidence that U.S. Bank’s prior explanation was wrong or insufficient.”

Here’s my big question: how much effort would it really have taken for the bank way back at the beginning of this fiasco to ask the borrower to return a recordable set of documents? If the bank in fact sent the second set of documents without any explanation, I would hope it has revisited its policies and procedures by now as a consequence of this litigation!

Despite the detailed provisions of Regulation X, the CFPB believes borrowers are most likely to raise questions and complaints outside the regulation’s formal processes. To ensure that servicers have systems in place for responding to errors and information requests through informal means (such as verbal inquiries), the CFPB clearly believes servicers should have reasonable policies and procedures for these situations. 

Accordingly, Regulation X § 1024.38(b)(ii) and (iii) generally requires servicers to maintain policies and procedures reasonably designed to ensure that they can investigate, respond to, and provide accurate and timely information and documents in response to borrower requests. (The regulation exempts “small servicers” from this requirement.) Any servicer that does not have clear, distinct, and unambiguous procedures and a decision tree for handling QWRs is risking considerable exposure to litigation. 

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