Friday, January 8, 2021

Open-End Credit in Loss Mitigation


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?


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.

Specifically, those loss mitigation procedures lie within Subpart C of Regulation X and, therefore, do not apply to “open-end” lines of credit. The case I have in mind is Bowler v Wells Fargo Bank.[i]

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.

In this case, the court held that the Supremacy Clause prevented state laws, such as Arizona’s, from interfering with substantive federal law, including RESPA. Accordingly, the Arizona statute did not govern, and the Bowlers did not waive the RESPA claim.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

[i] Bowler v Wells Fargo Bank, 2020 U.S. Dist. (D. Ariz. July 24, 2020)