Courts disagree about whether the Real Estate Settlement Procedures Act (RESPA) allows consumers to sue mortgage servicers for violating required error-resolution procedures. If a recent legal decision is any indication, that debate won’t end any time soon.In the ruling, Starke v. Select Portfolio Servicing, Inc., a borrower alleged that her mortgage servicer was liable to her for breaching their agreement to foreclose on her home. According to the complaint, borrower Tracy Starke defaulted on her mortgage and struck a deal with Select Portfolio Servicing (SPS) in which she assigned to that company all her rights in the property in exchange for SPS’s agreement not to sue her for any amount she might owe in excess of what the property fetched at a foreclosure sale. These are often called deed in lieu arrangements, meaning that the mortgage holder accepts from the borrower a deed surrendering her interests in the property in lieu of forcing the lender to go through the entire foreclosure process, which might result in the borrower owing more money than the property ultimately sells for.
One of the questions in Starke was whether a borrower has a private cause of action if her mortgage servicer violates a federal regulation relating to error-resolution procedures, specifically 12 C.F.R. § 1024.35. Among other prohibitions, that regulation bars a mortgage servicer from reporting a payment delinquency to a credit reporting bureau within 60 days of receiving from a borrower a qualifying notice of error. Courts have gone both ways on that question. Based on what the Consumer Financial Protection Bureau wrote in its notice implementing that regulation, the Starke court sided with those tribunals finding that consumers can sue for violations of that regulation.
Given the long-standing disagreement that courts have had over this issue, either the CFPB, Congress, or the U.S. Supreme Court should step in and settle this debate. The CFPB might be willing to do that if it receives sufficiently persuasive feedback in its recent calls for public comment.