Daily Development for Tuesday, December 3, 2002

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

MORTGAGES; ASSIGNMENT; RESPA: Loan servicer must use reasonable care and diligence to determine last known address of borrower for sending notice of loan transfer, or risk violation of RESPA and actual damages related to an improper notice.

Wanger v. EMC Mortgage Corporation, No. F037422, Cal. Ct. App., 5th Dist. (November 25, 2002).

In a case of first impression, the California Court of Appeals, determined that (i) RESPA requires a loan servicer to send notice to the last known address that borrower had sent to the original lender, and (ii) that the servicer could be liable for actual damages for failing to send proper notice.

The court concluded that the last known address of the borrower shall be determined with reference to the servicer's actual and constructive knowledge. Therefore, a servicer must exercise reasonable care and diligence in determining the correct address of the borrower when mailing a notice of transfer. The servicer is held to have constructive knowledge of a written change of address notice that was sent by the borrower to the original lender. Also, a separate cause of action for actual damages could be maintained for the RESPA violation and did not require proof that the foreclosure based upon the default that was the subject of the misaddressed notices was wrongful.

Wanger and First California Mortgage Company entered into a loan agreement in 1991. In 1993, a loan modification was discussed and possibly entered into between the parties. Thereafter, borrower failed to make any payments. Based on the original loan terms, First California claimed $26,616.96 was owed. Wanger paid $24,999.35 by cashier check on February 3, 1995, but continued to dispute the amount owed and claimed violations of the Real Estate Settlement Procedures Act of 1974 (RESPA), as amended, 12 United States Code section 2601 et seq.

The same month that she paid the undisputed $24,999,35 amount to First California, Wanger leased the property and moved. In April 1995, Wanger asserted, she reached an agreement with First California to resolve her claims. From July through November of 1995, Wanger claimed that she sent her monthly mortgage payments to First California.

However, First California had sold Wanger's loan to EMC on April 17, 1995. Both First California and EMC sent notice of the transfer to Wanger at the property address. Wanger, however, had moved to Washington and did not receive these notices. In an April 14, 1995, letter, Wanger (pursuant to the terms of the note and deed of trust) had notified First California of her new mailing address in Seattle. In September 1995, Wanger deeded the property to her daughter. In December 1995, EMC filed a notice of default to begin nonjudicial foreclosure proceedings.

Wanger claimed she first learned of EMC and its rights as assignee of the note and deed of trust on December 9, 1995, when she received a notice of trustee's sale from the trustee. During 1996 and 1997, Wanger and EMC were not able to settle their dispute.

EMC resumed nonjudicial foreclosure proceedings. A notice of default was again recorded on September 16, 1997 and EMC purchased the Property with a credit bid at the January 13, 1998, trustee's sale.

Thereafter, Wanger sued EMC.

The court's opinion is certified for publication only as to the section Wanger's claims under the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2601(b)(1)-(4) and Regulation X, 24 C.F.R. 3500.1 et seq. (2002)) and the effect of section 941 of the Cranston-Gonzalez National Affordable Housing Act of 1990 (Pub.L. No. 101-625 (Nov. 28, 1990) 104 Stat. 4079, 4405) that amended RESPA. The amendment included the addition of a new section 2605 requiring the servicer of certain real estate loans to notify the borrower when the loan is transferred to another servicer.

The notification provision in section 2605(b)(1) states "[e]ach servicer of any federally related mortgage loan shall notify the borrower in writing of any assignment, sale, or transfer of the servicing of the loan to any other person." Regulation X provides that "each transferor servicer and transferee servicer of any mortgage servicing loan shall deliver to the borrower a written Notice of Transfer, containing the required information about the servicer and the transfer. (24 C.F.R. 3500.21(d)(1)(i) (2002)).

The court states: "[i]n this case, the specific issue presented is whether the notice of transfer requirements contained in RESPA and Regulation X ( 2605; 24 C.F.R. 3500.21 (2002)) were violated when EMC mailed the notice of transfer to the address shown on the note and the deed of trust. The briefs filed by the parties did not cite any published case, regulation or treatise construing section 2605(b)(1) to determine what is adequate delivery of a notice of servicing transfer. Pursuant to [California] Government Code section 68081, we requested supplemental letter briefs from the parties addressing whether the language of RESPA and Regulation X governing notice of servicing transfers requires '(a) actual receipt by the borrower, (b) delivery based on the servicer's constructive knowledge of borrower's address, (c) delivery based on the servicer's actual knowledge of borrower's address or (d) some other standard.' After receipt of the supplemental letter briefs, it still appears we are faced with an issue of first impression." In a footnote, the court indicates that the parties contacted RESPA attorneys at the Office of General Counsel of HUD to find legal authority on the issue.

The court examined the definition of "delivery" in the RESPA requirements on escrow accounts established or controlled by a servicer which requires "the placing of a document in the United States mail, first-class postage paid, addressed to the last known address of the recipient" or hand delivery. (24 C.F.R. 3500.17(b) (2002).) Finding no other direct authority, the court found the requirement for delivery of a notice of the transfer of mortgage servicing by analogy to the delivery requirements in section 3500.17 of Regulation X. (24 C.F.R. 3500.17 (2002). Therefore, the court held "the notice of transfer requirements of section 2605 and Regulation X (24 C.F.R. 3500.21(d)(1)(i) (2002)) required EMC to place the notice 'in the United States mail, first-class postage paid, addressed to the last known address of' Wanger."

The court then proceeded to define the concept of a "last known address" and to hold that determination of the address includes constructive knowledge. The court's determination rested on the consumer protection purposes underlying RESPA generally and the notice of transfer provisions of section 2605. Specifically, the court stated: "[a]s to section 2605, we agree with those courts that conclude it is a remedial consumer protection statute. (Cf. Ploog v. HomeSide Lending, Inc. (N.D.Ill. 2002) 209 F.Supp.2d 863, 870 ['actual damages' under 2605(f)(1) include recovery for emotional distress]; Johnstone v. Bank of America, N.A. (N.D.Ill. 2001) 173 F.Supp.2d 809, 815 [same]; Rawlings v. Dovenmuehle Mortg., Inc., supra, 64 F.Supp.2d 1156 [same] with Katz v. Dime Sav. Bank, FSB (W.D.N.Y. 1997) 992 F.Supp. 250, 255-256 [

2605 not a consumer protection statute and, therefore, emotional distress not recoverable as actual damages].)"

Further, the court stated:

"[t]he level of responsibility imposed upon a servicer to provide notice of a transfer must reflect these general, sometimes conflicting, consumer protection purposes of RESPA as well as address the particular evils the notice of transfer provisions of section 2605 were designed to ameliorate, i.e., late charges being incurred and loan payments being made to the wrong party because the borrower is unaware the servicing of the loan has been transferred. Requiring the servicer to determine the last address of the borrower based on the servicer's actual knowledge would minimize cost. However, requiring a servicer to exercise reasonable care and diligence in determining the correct address of the borrower would decrease the number of notices of transfer sent to the wrong address. In balancing these considerations, we conclude the last known address of the borrower shall be determined with reference to the servicer's actual and constructive knowledge. In other words, a servicer must exercise reasonable care and diligence in determining the correct address of the borrower when mailing a notice of transfer."

The court also concluded that Wanger's cause of action could proceed for actual damages due to the alleged RESPA notice violation based upon the separate and distinct wrongful acts of the alleged failure give the statutorily required notice of transfer. The court stated that

"Wanger's recovery of actual damages under section 2605(f)(1) and attorney fees under section 2605(f)(3) are not dependent upon proving the foreclosure was wrongful, although the foreclosure might be among the actual damages . . . Actual damages may include, but are not limited to, (1) out-of-pocket expenses incurred dealing with the RESPA violation, (2) lost time and inconvenience to the extent it resulted in actual pecuniary loss, and (3) late fees. See Rawlings v. Dovenmuehle Mortg., Inc., , 64 F.Supp.2d at p. 1164 [$115 spent on photocopies, secretarial work, and travel to post office recoverable under 2605(f)(1)].) "

[some citations omitted]

The court rejected EMC's argument that the remedy envisioned by section 2605 for a failure to provide a notice of transfer is sending the servicer a qualified written request under section 2605(e) because "it is contrary to the plain language of the statute. Section 2605(f) provides that '[w]hoever fails to comply with any provision of this section shall be liable to the borrower' for actual damages. The phrase 'any provision of this section' plainly includes the provisions contained in section 2605(c) concerning notices by transferees of loan servicing."

Comment: Obviously there has to more to the story than this. The Bank wouldn't have "gone to the wall" in this case over the question of whether it gave adequate notice of transfer. But it does seem that the simple requirement that notice be given to the last address is a requirement that consumer lenders ought to be responsible for fulfilling.

If the error was that of the assignor, rather than the assignee, then the assignee ought to look to the assignee for indemnification.