Daily Development for Thursday, February 8, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; CONSUMER LAW; LOAN CHARGES: Consumers stated claims for unfair competition and breach of contract by alleging that mortgage lender overcharged for loan settlement costs.

McKell v. Washington Mut., Inc. 142 CA4th 1457, 49 CR3d 227 (2006)

Plaintiffs obtained home mortgage loans from Washington Mutual (WAMU). WAMU charged for underwriting and wire transfers, stating the purported costs on its HUD-1 Settlement Statement, and for tax services, stated in its deeds of trust. It charged substantially more for these services than it paid the service providers.

Plaintiffs sued WAMU for breach of contract, breach of bailment, unjust enrichment, conversion, and violation of the Unfair Competition Law (UCL) (Bus & P C §§17200-17210) and the Consumers Legal Remedies Act (CLRA) (CC §§1750-1784). The complaint also alleged that WAMU's practices violated the Real Estate Settlement Procedures Act (RESPA) (12 USC §§2601-2617) and Regulation X (24 CFR §§3500.1-3500.21) interpreting RESPA. The trial court sustained WAMU's demurrer without leave to amend and entered an order of dismissal, ruling there was no implied requirement to charge only pass-through costs.

The court of appeal reversed. UCL causes of action based on fraudulent, unfair, and unlawful business practices may be established independent of any contractual relationship between the parties. Consequently, Plaintiffs need not have pleaded an implied agreement to charge only pass-through costs.

Plaintiffs stated causes of action under the UCL:

"Fraudulent business practices. WAMU's practice of charging more than the actual costs without indicating to customers that it was doing so may constitute a deceptive business practice under the UCL because a reasonable consumer likely would believe that fees charged in connection with a home mortgage bore some correlation to services rendered.

"Unfair business practices, which violate established public policy, resulting in harm to consumers. Plaintiffs alleged violation of the federal public policy of expanding opportunities for home ownership by reducing the cost of borrowing, in part through the use of automated underwriting software, and harm to consumers through WAMU's failure to pass on to borrowers savings resulting from the use of the software. Similarly, they alleged violation of public policy and harm to consumers through overcharging for wire transfers and tax services.

"Unlawful business practices. Plaintiffs alleged that WAMU's practices violated RESPA, which was enacted to reduce the costs consumers pay to settle their real estate transactions. RESPA prohibits kickbacks and unearned fees. RESPA §8(b) prohibits a settlement service provider from marking up the cost of another provider's services without providing additional settlement services. 24 CFR §3500.14(g)(3)."

The court further held that federal law did not preempt the UCL causes of action. RESPA and Regulation X provide that RESPA does not preempt state law except to the extent it is inconsistent with federal law, and that a state law is not inconsistent with federal law if it provides more protection to consumers. Congress did not intend any preemption if state law did not interfere with the operation of the federal law, and it was possible to comply with both. Accordingly, RESPA and Regulation X do not preempt state law causes of action for violation of their provisions.

The court further ruled that Plaintiffs stated a cause of action for breach of contract. The deed of trust was viewed as the contract requiring them to pay the fee for tax services. Because applicable law forms a part of a contract as if expressly referred to and incorporated, the deed of trust required that any tax services charged comport with RESPA; Plaintiffs alleged that the fee violated RESPA.

Plaintiffs, however, failed to state common law causes of action for unjust enrichment, breach of bailment agreement, and conversion. And the court also ruled that plaintiffs did not plead a cause of action under CLRA, specifically CC §1770(a), which applies to actions undertaken in transactions resulting in the sale or lease of goods or services, not to WAMU's actions undertaken in transactions resulting in the sale of real property.

Reporter's Comments: Congress wanted to look like it was doing something in 1974, when it enacted RESPA, so it passed a statute that could appeal to all sides by, on the one hand, outlawing unearned fees while, on the other, upholding fees for services actually performed. On top of that, it employed terrible language in saying "no person shall give and no person shall accept," leaving it for the courts to decide whether it took one or necessarily two persons to make an overcharge illegal. This split decision is the inevitable result.

The division between the two factions of this panel is no worse than it is among the federal circuit courts, which have had to face this particular markup controversy more frequently. While the outcome of those federal cases is described as 3 (allowing markups) to 1 (against them) to 1 (unsure), the actual split is closer, in light of last year's Third Circuit decision against markups (see Santiago v GMAC Mortgage Group, Inc. 417 F3d 384 (3d Cir 2005), which really makes it 3-2-1. (For an overall description of those cases, see Bock, RESPA, HUD, and Mortgage Markups, 74 U Cin L Rev 1415 (Summer 2006).) If this goes higher, I expect it will be decided on a 4-3 (in Sacramento) or 5-4 (in Washington) basis. We cannot really expect that Congress will ever be inclined to take a more concrete position that might get some of its members unelected..

The Reporter for this item was Professor Roger Bernhardt of Golden Gate University Law School in San Francisco, writing in the California CLE Real Property Reporter (excerpted with permission).

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