Business Solutions Alert: Ninth Circuit Limits Loan Servicer’s Duty to Respond to Borrower’s Inquiries Under RESPA

On December 11, 2012, the Ninth Circuit in Jaime Medrano v. Flagstar Bank, FSB, Case No. 11-55412, held that a loan servicer has no duty under the Real Estate Settlement Procedures Act (“RESPA”) to respond to letters from borrowers who challenged the terms of their home loan.

Medrano purchased a home with a loan that was serviced by Flagstar Bank. Flagstar notified Medrano that it intended to increase the monthly payments because their escrow account had insufficient funds to cover taxes, insurance, interest, and principal. Medrano’s counsel sent three letters disputing any obligation to make the increased payments even though the increased payments were consistent with the loan documents. Flagstar never responded to the letters, and Medrano filed suit claiming that Flagstar violated 12 U.S.C. §2605 because it did not respond adequately to the letters that challenged the monthly payment due on their home loan. The district court dismissed the action because the letters that were sent by the borrowers were not valid “qualified written requests” (“QWR”), thus, the servicer did not incur the duty to respond under §2605.

On appeal, the Ninth Circuit discussed the circumstances that require a loan servicer to respond to a borrower’s QWR. A QWR must (1) reasonably identify the borrower’s name and account, and (2) either state the reasons that the borrower believes the account is in error or provide sufficient detail regarding other information sought by the borrower. The duty to respond to a QWR is only triggered if the correspondence relates to the servicing of a loan.

The Court adopted the Seventh Circuit’s approach to defining what qualifies as a qualified written request that will trigger a servicer’s duty to respond. The Court distinguished between letters that relate to borrowers’ disputes regarding servicing, on the one hand, and the borrower’s contractual relationship with the lender, on the other. The Court held that letters challenging only a loan’s validity or its terms are not qualified written requests that give rise to a duty to respond.

In Medrano’s case, the letters disputed accuracy of the increased payment schedule by claiming the servicer committed fraud or mistake. Because the letters questioned the loan’s validity and terms, not servicing, the Court agreed with the district court’s finding that the letters were not qualified written requests relating to the servicing of Medrano’s loan, and therefore Flagstar did not have a duty to respond to the letters.

The filing of RESPA actions over the past few years has significantly increased in light of the foreclosure crisis. In light of the current environment, servicers should proceed with caution when handling correspondence by a borrower that may be considered a QWR. Servicers should review their current practices and determine whether new safeguards and procedures should be implemented.

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December 18, 2012