Commercial Litigation

Limiting the Scope of Qualified Written Requests Under RESPA

“Dear Servicer, Please provide all documents concerning the Loan, as required by RESPA. Sincerely, Borrower”

With the increase in residential mortgage defaults across the United States, mortgage servicers have also seen a rise in what is being termed a “qualified written request” (“QWR”) under the Real Estate Settlement Procedures Act (“RESPA”) from borrowers. Many of these alleged QWRs read like the title of this article, request voluminous documents, and cost servicers valuable time and resources to answer. When reviewing these purported QWRs, servicers should take a closer look to determine whether they actually qualify as such under RESPA.

Under 12 U.S.C. § 2605(e), a QWR means “a written correspondence, other than notice on a payment coupon or other payment medium supplied by the servicer, that — (i) includes, or otherwise enables the servicer to identify, the name and account of the borrower; and (ii) includes a statement of the reasons for the belief of the borrower, to the extent applicable, that the account is in error or provides sufficient detail to the servicer regarding the other information sought be the borrower.” Servicers must acknowledge receipt of the QWR within twenty business days of receipt by written response and take action on the inquiry, if necessary, within sixty business days of receipt of the QWR. Violating these provisions can result in liability for the borrower’s
actual damages and costs, including attorneys’ fees. 12 U.S.C. § 2605(f). An additional $1,000.00 can be awarded to the borrower if a pattern or practice of non-compliance with these requirements is found. Id.

Generally, it is relatively simple for servicers to investigate specific allegations of servicing errors and answer the same in an economic fashion and within the given time frames set by RESPA. However, some borrowers have latched onto the language “regarding other information sought by the borrower” at the end of Section 2605(e) and have used it to request extensive documents and other information concerning the loan that is not servicing-related. For example, borrowers will request entire loan origination files, the original Note or Security Instrument, information regarding attempted rescission of the loan, or other nonservicing issues. In effect, these borrowers are trying to conduct improper discovery without filing suit, stall default proceedings
on their loans, or submit the request for some other reason that is not supported by the intention of the statute.

Case law from numerous federal districts has shed light on the extent of what “other information sought by the borrower” can be sought through this Section. Specifically, courts have limited those requests for “other information” to information related to the servicing of the loan. Servicing is defined as “receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow accounts…, and making the payments of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan.” 12 U.S.C. § 2605(i)(3). As such, servicers would only be required to respond to requests relating to payment issues, not origination, validity of loan, or other issues frequently alleged by borrowers. When reviewing these purported QWRs, servicers should look to what documents or other information that is actually being requested and compare it to the definition of  “servicing” as set forth in RESPA to see if it actually fits that description. Even if the request does not require an answer, it is the better practice to respond to the borrower, in writing, advising of such. Because this is a quickly expanding area of the law, servicers should consider consulting an attorney concerning any questions as to whether to answer the alleged QWR.

By J. Allen Smith and Jeremy J. Overbey

Commercial Litigation

New Modification Program Could Be Beacon of Hope in the Seemingly Hopeless World of Troubled Mortgages

The fingers of those laying blame for the financial crisis have pointed in a number of directions, including Wall Street investment banks, securities ratings agencies, mortgage brokers, Fannie Mae and Freddie Mac, and politicians on both sides of the aisle. Regardless of who is ultimately at fault, it is undeniable that at the heart of the crisis lie troubled mortgage loans.

For various reasons, including falling home prices, creative loan products, and interest rate adjustments, default rates on mortgage loans increased dramatically over roughly the last two and a half years, from under 5 percent in the third quarter of 2006 to roughly 12 percent at the end of 2008. While the problem initiated in the subprime market and in states like Florida, California, and Nevada, the problem eventually spread through the prime market as well, affecting homeowners nationwide with loans of wide-ranging values. As mortgage defaults became widespread, mortgage-backed securities failed, as did the credit default swaps effectively insuring them, leaving investors with assets of dubious, if any, value.

From a litigation perspective, rising default and foreclosure rates have spawned an escalating volume of foreclosure-related litigation. Borrowers are bringing a variety of claims challenging their loans, the rights of lenders to foreclose, and the rights of lenders to evict. In many of these cases, loan modifications would potentially be the most advantageous resolution for both borrower and lender alike due to falling home prices, increasing days on market, and already inflated lender REO inventories. But modifying these loans is often a difficult proposition for lenders due to high default amounts, and many borrowers are facing pay cuts and layoffs, further stymieing their ability to make monthly payments.

Legislators have been searching for solutions to assist with modifications, but to date an effective solution has remained elusive. For example, Congress passed the HOPE for Homeowners Act of 2008 with the goal of creating an FHA program to help homeowners avoid foreclosure by fostering modifications to reduce principal balances and interest rates. Due to the program’s hard-to-meet requirements, however, it is estimated that there have been fewer than 100 applications nationwide for participation in the program and as few as only one foreclosure actually prevented as a result of the program.

Despite the failure of prior programs, there may yet be hope on the horizon. Just recently, on March 4, 2009, the Treasury Department announced the “Making Home Affordable” program, a new attempt to assist with modifications to avoid foreclosure. The $75 billion program will require participating lenders to reduce payments to no more than a 38 percent debt-to-income ratio (“DTI”). For further payment reductions down to a 31 percent DTI, the Treasury Department will provide lenders with dollar-for-dollar matching to soften their losses. Lenders will have the option to forbear principal, extend loan terms up to 40 years, and reduce interest rates as low as 2 percent for a period of 5 years before they are gradually increased back. Servicers will receive an upfront incentive of $1,000 for each modification under the program, and will also receive additional $1,000 incentive payments for up to 3 years for borrowers who stay in the program. Among the eligibility requirements are an unpaid principal balance of $729,750 or less, and occupation of the collateral property as a 1 to 4 unit primary residence.

Because the Making Home Affordable program is so new, its actual impact, of course, remains to be seen. But changes in this program from its predecessors, such as the elimination of loan-to-value ratio caps for participation, seem to indicate that legislators may be learning from their prior failed attempts, engendering cautious optimism that an effective solution will be found soon.

By J. Garth Fennegan and Michael R. Steinmark

Firm News

SettlePou Welcomes New Attorneys

Now celebrating our 30th anniversary, SettlePou believes we have consistently achieved our clients’ unique goals throughout our history because of the quality of our people. Our highly skilled and service oriented attorneys and qualified support staff enable the firm to deliver superior legal services to our clients with an unusual blend of big-firm expertise and small-firm attention. With that in mind, SettlePou is proud to announce that we have now grown to 30 attorneys with the addition of our newest associates, Byron L. Kelley and Jay D. Reyero.

Byron L. Kelley joined the firm’s Commercial Litigation Section effective August 19, 2008. Mr. Kelley is a 2008 cum laude graduate of the SMU Dedman School of Law, and earned his B.S. in Communication Studies from the University of Texas at Austin in 2002, where he was a recipient of the LBJ Fellowship. During law school, Byron served as an Articles Editor for the International Law Review Association. In his free time, Byron enjoys playing golf and is an avid college football fan.

Jay D. Reyero joined the firm’s Business Counsel Services Section effective August 18, 2008. Mr. Reyero is also a 2008 cum laude graduate of the SMU Dedman School of Law, and earned his B.A. with High Honors in Management of Information Systems from the University of Texas at Austin in 2004. While in law school, Jay competed in the John Marshall Moot Court competition, participated in the SMU Small Business Clinic, and was the Executive Editor for the SMU Science and Technology Law Review. Jay is married to Katie Reyero.

Byron and Jay successfully completed the July 2008 Texas Bar Exam and were licensed to practice law in Texas in November of 2008. SettlePou is excited to welcome our newest attorneys to the team.