Defending Class Action Claims Alleging RESPA Violations
Part I Overview of Statute and Summary of Jurisdiction
Many lenders have had to defend themselves against class actions alleging violations of RESPA. In simplest terms, the Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. sections 2601 et seq., and Regulation X (24 C.F.R. sections 3500 et seq.) governs disclosures to borrowers of the closing costs associated with residential loan transactions. RESPA is a “consumer protection” statute, enacted in 1974 to protect borrowers whose loans will be secured by a mortgage against one-to-four family residential property. It serves two main purposes. First, it serves to educate the consumer-borrower about the costs of settlement services (that is, the costs associated with borrowing money). Second, it serves to eliminate “unearned fees,” such as kickbacks or referral fees, as such fees increase the cost of the loan to the borrower.
RESPA requires that both mortgage brokers and lenders make certain disclosures to borrowers at the time the borrower applies for the loan. Specifically, RESPA requires a lender to provide a HUD-1 or HUD-1A settlement statement to “clearly itemize all charges imposed upon the borrower,” 12 U.S.C. § 2603(a). The HUD-1 Settlement Statement itemizes for the borrower the actual settlement costs of the loan transaction. A lender is required also to provide borrowers with “a Good Faith Estimate” (the “GFE”) to include “a good faith estimate of the amount or range of charges for specific settlement services the borrower is likely to incur” at the closing, 12 U.S.C. § 2604(c) and 24 C.F.R. § 3500.7(a). (Other RESPA requirements are discussed in a separate article.)
Federal courts have original jurisdiction in cases involving RESPA violations, see Dominguez v. Alliance Mtg. Co., 226 F. Supp. 2d 907, 914 (N.D. Ill. 2002), and RESPA claims are properly subject to removal, Sicinski v. Reliance Funding Corp., 461 F. Supp. 649, 650-51 (S.D. N.Y. 1978). Unfortunately, case law discussing state versus federal court jurisdiction over RESPA claims often glosses over critical statutory differences enacted by Congress. More specifically, while Congress provided for concurrent state and federal jurisdiction over certain portions of REPSA, federal courts have exclusive jurisdiction over other RESPA violations. 12 U.S.C. § 2614.
For example, the requirement that consumers be timely and accurately informed of the closing costs associated with residential loans is based on federal law. “The Congress finds that significant reforms in the real estate settlement process are needed to insure that consumers throughout the Nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices that have developed in some areas of the country.” 12 U.S.C. § 2601(a).
In order to redress these concerns, RESPA requires a lender to provide a HUD-1 or HUD-1A settlement statement to “clearly itemize all charges imposed upon the borrower,” 12 U.S.C. § 2603(a). Federal law further requires a lender to provide borrowers with “a Good Faith Estimate” (the “GFE”) that includes “a good faith estimate of the amount or range of charges for specific settlement services the borrower is likely to incur” at the closing, 12 U.S.C. § 2604(c) and 24 C.F.R. § 3500.7(a). The failure to timely or accurately disclose to a borrower the closing costs likely to be incurred in connection with a residential loan transaction violates RESPA.
RESPA requires a lender to provide a HUD-1 or HUD-1A settlement statement to “clearly itemize all charges imposed upon the Borrower,” and that this settlement statement is required by 12 U.S.C. § 2603(a). A lender is required also to provide borrowers with “a Good Faith Estimate” (the “GFE”) to include “estimates of the amounts or ranges of all settlement costs likely to be incurred at the closing,” and the GFE is required by 12 U.S.C. § 2604(c) and Regulation X, 24 C.F.R. section 3500.7(a).
Thus, if, for example, a plaintiff alleges that the lender surprised borrowers with unexpected closing costs, or otherwise failed to disclose certain closing costs not expressly referenced in a HUD-1 or HUD-1A, then the action is based exclusively on federal law. Put simply, under such circumstances, the bottom line is that if the lender had disclosed properly all closing costs as required by RESPA and Regulation X, then the plaintiff would not have been injured. Such a claim, then, is derived entirely from alleged violations of federal law viz., RESPA and Regulation X.
It is well settled that RESPA claims are subject to removal. Sicinski v. Reliance Funding Corp., 461 F. Supp. 649, 650-51 (S.D. N.Y. 1978). Indeed, federal courts have original jurisdiction in cases involving alleged RESPA violations. See Dominguez v. Alliance, 226 F.Supp. 2d at 914 (“Our jurisdiction . . . was predicated on the federal RESPA claims. . . . Having disposed of all claims over which we had original jurisdiction, we decline to exercise our supplemental jurisdiction over the remaining state law claim.” (Italics added.)). Accord Ploog v. Homeside Lending, Inc.¸ 209 F. Supp. 2d 863, 867 (N.D. Ill. 2002) (RESPA claim “only claim over which the Court has original jurisdiction”); DeLeon v. Beneficial Const. Co., 998 F. Supp. 859, 867 (N.D. Ill. 1998).
A lender must be careful to analyze whether the plaintiff’s right to relief depends on the resolution of a substantial, disputed federal question such as whether the lender allegedly violated RESPA and Regulation X. If the Complaint does not advance independent state law claims but, rather, posits theories that are wholly derivative of federal law, then removal may be proper. Moreover, lenders must remember that Congress did not grant concurrent jurisdiction to state courts for all alleged RESPA violations, and must analyze whether jurisdiction over the claims in a complaint is exclusively federal.