One area of the Real Estate Settlement Procedures Act that receives scant attention is its mortgage-servicing requirements. A new ruling from a California federal court shows how little is needed to sue over alleged violations of those requirements.
The case, Smith v. Specialized Loan Servicing, stems from unremarkable events. The borrower, Margarette Smith, is an elderly woman who suffers from dementia. She authorized her daughter and then her granddaughter to manage her affairs. At some point, Smith was moved into a nursing home, letting family members live in her newly-vacant home. Smith’s mortgage payments then fell into arrears, a situation her family tried to correct by submitting no fewer than five loss mitigation applications to her mortgage servicer, Specialized Loan Servicing (SLS). Over the course of the next few years, the two sides exchanged dozens of letters, ultimately resolving nothing.
Smith sued, accusing SLS of violating, among other laws, RESPA’s Regulation X by failing to timely notify her of its receipt of her applications and by not telling her whether the documents were complete; by failing to offer appropriate mitigation options; and by starting foreclosure proceedings before the mitigation process had concluded.
SLS moved to dismiss the case, but the trial court denied its motion. Regarding Smith’s purported lack of standing (because her house was no longer her primary residence, as required by Regulation X), the court allowed her to refile her complaint with revised allegations. And, for damages, it sufficed that Smith had lost time and experienced inconvenience from having to file multiple loss mitigation applications. Finally, Smith’s allegations about SLS’s supposed pattern or practice of violating RESPA–its sending of 17 unlawful letters to her over a period of 22 months) were enough to sustain her demand for additional damages.
The key takeaway from Smith is that, in the hands of a competent attorney, any loss-mitigation application gone awry can lead to a possible lawsuit. Through vigorous training, mortgage servicers can reduce the likelihood of getting sued, but they can’t eliminate that risk completely. Even if they end up getting sued, regular training will increase the chances that they will eventually win the lawsuit, despite having to deal with it at all.