QUESTION
I am the Associate
General Counsel of a mid-size lender. Subpart C of Regulation X applies to any
“mortgage loan,” to mean any federally related mortgage loan, subject to certain
exemptions, except that it does not apply to “open-end lines of credit (home
equity plans).”
Although the Regulation X provision does not define “open-end,” the contexts of its use in Regulation X suggest that the term should be defined as it is in Regulation Z. For example, Regulation X cross-references the Regulation Z definition.
I am particularly interested in how Regulation X applies loss mitigation procedures to open-end credit. How does Regulation X apply loss mitigation procedures to what a creditor claims is open-end credit?
ANSWER
Let’s first get some
citations in place, so we know what we’re referencing.
First, let’s go to the Truth-in-Lending Act (TILA) and Regulation Z, its implementing regulation, which defines the term “open-end credit” to mean consumer credit extended by a creditor under a plan in which:
(1) the creditor
reasonably contemplates repeated transactions;
(2) the creditor may
impose a finance charge from time to time on an outstanding unpaid balance; and
(3) the amount of
credit that may be extended to the consumer during the term of the plan (up to
any limit set by the creditor) is generally made available to the extent that
any outstanding balance is repaid.
Any consumer credit that does not fit within this definition is considered “closed-end” credit.
Second, with respect to Subpart C of Regulation X – which is the implementing regulation of the Real Estate Settlement Procedures Act (RESPA) – this section applies to any “mortgage loan,” defined by 12 CFR § 1024.31 to mean any federally related mortgage loan, subject to the exemptions of 12 CFR § 1024.5(b), except – as you quote – it does not apply to “open-end lines of credit (home equity plans).”
And third, although this Regulation X provision does not define “open-end,” the usage context in Regulation X suggests that the term may be defined as it is in Regulation Z. For instance, Regulation X § 1024.6(a)(2) cross-references the Regulation Z definition.
As readers of my Mortgage FAQ articles know, I often like to illustrate responses by utilizing real-world examples. So, my response will briefly discuss a relatively recent federal district court decision in Arizona that considered the application of Regulation X § 1024.41’s loss mitigation procedures to what a creditor claimed was open-end credit.
For almost 20 years, the Bowlers
owned their home in Arizona. In 2006, they obtained a home equity line of
credit (HELOC) from Wells Fargo, secured by a deed of trust on their home. In
2009, Wells Fargo restricted the Bowlers' ability to use the line to obtain
additional credit extensions. In January 2010, the Bowlers and Wells Fargo
signed a modification in which the Bowlers consented to a permanent termination of their ability to draw additional amounts on
the credit line. About a year later, they agreed to another modification,
which again did not allow the Bowlers to draw additional amounts on the credit
line.
But, in 2018, the Bowlers
defaulted. In 2019, they applied for a loan modification and included
supporting documents. In August 2019, the bank called the Bowlers and asked for
more documentation, such as pay stubs and Social Security information, which
the Bowlers sent three or four days later. On August 5th, the
Bowlers also sent a narrative letter the bank had requested.
The bank prepared an August 9th
letter that listed “next steps” for the Bowlers, including a table showing the
status of the documents Wells Fargo needed from them to complete the
application. The table indicated that some of the requested documents had not
been received, some had been received but were incomplete, and other documents
had been received and were complete. The Bowlers claimed they never received
the letter.
On August 14th, the
bank called the Bowlers and asked for the “same documents.” The Bowlers said
they’d already provided all of the documents. In response, a bank employee
promised to see whether she could find them. On September 5th, the
bank told the Bowlers it had not received the “additional documentation” and
would again look for them. The Bowlers then faxed “the requested documents” to
Wells Fargo.
On September 13th, the
bank drafted a letter stating that the bank was no longer reviewing the account
for assistance options, as it had not received all of the documentation it
needed. The Bowlers claimed they never received this letter, too.
On September 18th, the
bank told the Bowlers that their application was “no longer in review.” The
Bowlers frantically called the bank but were told there was nothing the bank
could do to stop a foreclosure sale. The bank sold the property at the sale.
Throughout the next week, Mr. Bowler “became increasingly anxious and upset,”
and his blood pressure, previously well-controlled, increased to the high
180s/120s. He visited his doctor, who increased his blood pressure medication.
The Bowlers sued the bank for
negligence, negligent infliction of emotional distress (“NIED”), and RESPA
violations.
The court dismissed the claims.
The negligence claims failed because
Wells Fargo did not owe the Bowlers a duty of care. For those of you who
are not familiar with this term, it is a legal requirement that a person act
toward others and the public with the watchfulness, attention, caution, and
prudence that a reasonable person in the circumstances would use. So, if a
person's actions do not meet this standard of care, then the acts are
considered negligent, and any damages resulting may be claimed in a lawsuit for
negligence – that’s just a heavily ladened way of saying that the duty of care
is a legal obligation to always act in the best interest of individuals and
others, and not act or fail to act in a way that results in harm.
This litigation took place in
Arizona, and the federal district courts in Arizona have routinely held that
lenders and loan servicers have a non-contractual duty towards borrowers; that
said, the duty is narrow and generally limited to the duty to disclose the
correct amount of monthly payments, a duty not relevant to the Bowlers’ claims.
Thus the NIED claim failed
because: (1) the Bowlers failed to plausibly allege that the husband’s mental
anguish was in “the zone of danger so as to be subject to an unreasonable risk
of bodily harm created by” Wells Fargo’s foreclosure proceedings; (2) the
Bowlers did not even attempt to allege that Wells Fargo knew or should have
known that either of the Bowlers was susceptible to an illness or bodily harm;
and (3) while the Bowlers plausibly alleged Wells Fargo caused the husband’s
emotional distress, Wells Fargo’s conduct did not involve an unreasonable risk
in causing it.
Now, as
to RESPA, the court rejected Wells
Fargo’s argument that RESPA’s loss mitigation provisions did not apply to the
Bowlers’ loan because it was an open-end line of credit; and, furthermore, the
HELOC became a closed-end loan because of the modifications the parties made to
disallow the Bowlers from drawing additional amounts. The court also concluded
that the Bowlers’ allegations insufficiently alleged that they had supplied
Wells Fargo with all the documents it requested for processing the loan
modification.
The bank argued that the Bowlers
had waived their RESPA claim by not obtaining an injunction before 5 PM on the
day before the foreclosure sale. In support of this argument, the bank cited an
Arizona statute that provides: “The trustor…shall waive all defenses and
objections to the sale not raised in an action that results in the issuance of
a court order granting relief pursuant to rule 65, Arizona rules of civil
procedure, entered before 5:00 p.m. mountain standard time on the last business
day before the scheduled date of the sale.”
The court rejected this purported
waiver based on the Supremacy Clause of the U.S. Constitution. This clause makes
the Constitution and all laws on treaties approved by Congress in exercising
its enumerated powers the supreme law of the land. Thus, judges in state court
must follow the Constitution or federal laws and treaties, if there is a
conflict with state laws.
[i] Bowler v
Wells Fargo Bank, 2020 U.S. Dist. (D. Ariz. July 24, 2020)
