/>iWith the recent developments at the Consumer Financial Protection Bureau (CFPB), many mortgage lenders have been left wondering about the extent to which the CFPB will enforce federal laws governing the mortgage lending industry. Many industry participants expect a significant reduction in CFPB enforcement activity for the foreseeable future. While the states could ramp up their enforcement efforts to account for a less active CFPB, mortgage lenders should also recognize that borrowers – and by extension the plaintiff’s bar – could step in to any gap left by the CFPB and exercise their private rights of action under various federal and state laws governing mortgage lending.
While the torts adage of “anyone can sue anyone over anything” still rings true, we have identified several prominent mortgage lending laws below that provide borrowers a private right of action and pose litigation risk for mortgage lenders. Mortgage lenders should continue to ensure compliance with these laws for both short-term and long-term mitigation of potential liability. Failure to mitigate these risks today could lead to deficiencies in compliance that are compounded across multiple loans over time and create greater lender exposure to potential borrower litigation.
Federal Law Private Rights of Action
Truth in Lending Act (TILA)
TILA imposes various requirements on mortgage lenders, including disclosure-related requirements for both open-end and closed-end loans. Under 15 U.S.C.A. § 1640(a), a borrower is provided a private right of action for a creditor’s violation of TILA that generally must be brought within one year of the violation. A creditor is liable for actual damages sustained as a result of its TILA violation, attorneys’ fees, and statutory damages depending on the circumstances of the transaction, such as damages between $400 and $4,000 for closed-end mortgage transactions. Some jurisdictions allow for the application of vicarious liability on creditors for the acts of its servicers under TILA(see e.g., Montano v. Wells Fargo Bank N.A., 2012 WL 5233653 (S.D. Fla. Oct. 23, 2012)). TILA also provides for borrower class actions and limits a lender’s liability in those cases to the lesser of $1 million or 1% of the lender’s net worth.
Home Ownership and Equity Protection Act (HOEPA)
HOEPA governs abusive lending practices related to high-cost mortgages. Although HOEPA is technically part of TILA, federal law imposes additional lender liability for HOEPA violations. In addition to the lender liability for TILA outlined above, a lender that violates HOEPA is required to refund all finance charges and fees that were assessed in connection with the particular loan pursuant to 15 U.S.C.A. § 1640(a)(4). Moreover, violating HOEPA’s disclosure requirements (creditor’s must “clearly and conspicuously disclose” the borrower’s rights of rescission) may trigger an extended right of rescission, which expires three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first (15 U.S.C. § 1635(f)).
HOEPA is also important to consider as industry changes related to interest rates may impact the prevalence of loans that fall under HOEPA. For some mortgage lenders, this new interest rate environment may lead to the lender making an increased number of high-cost mortgage loans.
Homeowners Protection Act (HPA) – PMI Cancellation Act
While seen more prominently in the servicing context, HPA outlines requirements regarding borrower paid private mortgage insurance. More importantly in the originations context, HPA requires the lender provide certain disclosures to borrowers at consummation regarding rights to cancel PMI and the necessary procedures for doing so (12 U.S.C. § 4903(a), (b)). HPA creates a private right of action for violations, and the borrower may recover actual and statutory damages, attorneys’ fees, and costs (with class action defendants liable for costs and attorneys’ fees) (12 U.S.C. § 4907(a)). The borrower must bring an HPA claim within two years of the discovery of the violation.
Equal Credit Opportunity Act (ECOA)
ECOA creates various requirements for lenders related to the extension of credit, including obligations in evaluating a borrower’s credit application and an obligation to provide specific borrower notifications. Under 15 U.S.C.A. § 1691e, a lender is liable for any actual damages, attorneys’ fees, or punitive damages resulting from a violation of ECOA. The punitive damages are capped at $10,000 for an individual borrower, or in the case of class action, punitive damages are capped at the lesser of $500,000 or 1% of the lender’s net worth. Pursuant to 12 CFR § 1002.16(b)(1), a borrower’s claim for an ECOA violation must be brought within five years of the violation or within one year of an administrative enforcement action that is brought within five years of the violation.
Real Estate Settlement Procedures Act (RESPA)
Pursuant to 12 U.S.C. § 2607(d), RESPA provides a private right of action and treble damages for a number of violations, including Section 8 prohibitions on kickbacks and unearned fees. Similarly, borrowers may bring a private action for violations of RESPA Section 9’s prohibition on required usage of title insurance providers under 12 U.S.C. § 2614. Such claims must be brought within one year of the alleged violation. Moreover, 12 U.S.C. § 2605(f) establishes a private right of action for borrowers where the lender fails to provide a notice disclosing whether the loan may be assigned, sold, or transferred. Costs, attorneys’ fees, actual damages and statutory damages are all recoverable (the latter when a pattern or practice of noncompliance is established). Claims under this provision must be brought within three years.
State Law Private Rights of Action
While federal law tends to be at the forefront for most mortgage lenders, all states also have laws that can impact mortgage lenders, including laws that provide borrowers a private right of action against lenders. And at times, these state laws can present an easier route for borrower recovery compared to federal law. For example, federal law prohibits unfair, deceptive, or abusive acts or practices (UDAAP) in the mortgage lending context. This prohibition is indeterminate to the point that it could be applied in a wide variety of factual scenarios. Many states have a comparable prohibition, although the state version of UDAAP typically only prohibits unfair or deceptive acts or practices (UDAP). And while there is some variation in whether state UDAP laws apply to mortgage lenders, almost all state UDAP laws provide borrowers, individually or as a class, a private right of action, unlike the federal UDAAP law.
Many states also regulate a lender’s ability to make high-cost mortgage loans. As indicated above, there are various legal requirements, such as conducting an ability to repay analysis, a mortgage lender must typically satisfy before or in connection with making a high-cost mortgage loan. Many states provide borrowers a private right of action for a lender’s violation of these laws, which can result in anything from lenders refunding excess interest to lenders having to pay actual and statutory damages.
The federal and state laws discussed above are only a portion of the laws governing mortgage lending that grant borrowers a private right of action. Mortgage lenders should keep this in mind even if the CFPB takes a backseat in enforcement, because at the end of the day, those laws are still valid and enforceable in a court of law.
