Consumer Crossroads: Where Financial Services and Litigation Intersect

A recent ruling by the US Court of Appeals for the First Circuit could signal heightened exposure for lenders and servicers to state escrow-on-interest statutes, along with greater litigation risk.

Loan servicers and their counsel are often sued by consumers during contested mortgage foreclosure proceedings. The United States Supreme Court’s opinions in Spokeo, Inc. v. Robins[1] and TransUnion v. Ramirez[2] continue to be an important precedent in defending consumer claims.

Last week, the Texas Supreme Court answered the Fifth Circuit’s certified question as to whether simultaneous rescission and reacceleration can reset the limitations period under Texas Law by holding that “a rescission that complies with the statute [Tex. Civil Practice and Remedies Code Section 16.038] resets limitations even if it is combined with a notice of reacceleration.” Moore v. Wells Fargo Bank, N.A., No. 23-0525, 2024 Tex. LEXIS 156, at *2 (Feb. 23, 2024).

On May 10, 2021, ruling on an issue of first impression, the U.S. Court of Appeals for the Second Circuit in Maddox v. Bank of New York Mellon Trust affirmed denial of BNY Mellon's motion for judgment on the pleadings, finding that plaintiffs have Article III standing to sue over the alleged violation of legal interests created by New York State statute. The ruling has important implications for mortgage lenders and their servicers.

We previously reported on the impact of the CARES Act on federally backed mortgage loans, including the immediate availability of a 180 – 360 day forbearance plan for borrowers impacted by the pandemic. One key feature of this legislation and accompanying guidance publications is that servicers of GSE loans are required to evaluate borrowers for repayment options—including reinstatement, a repayment plan, modification, or some other workout—at the conclusion of the forbearance period. The forbearance plans do not offer loan forgiveness, and borrowers and their servicers are expected to resolve the forbearance amount at the end of the plan.

The U.S. Department of Housing and Urban Development's (HUD) Office of Inspector General issued a COVID-19 bulletin for homeowners that revealed the HUD has been monitoring what readily accessible information FHA mortgage servicers are providing to borrowers on their websites. The Federal Housing Administration (FHA) has already provided guidance to FHA servicers regarding implementation of the CARES Act as it pertains to provisions related to forbearance. However, HUD's Inspector General warned in the bulletin that its review of the top 30 FHA servicers' websites revealed "incomplete, inconsistent, dated, and unclear guidance" to borrowers in connection with their forbearance options under the CARES Act.

On April 20, 2020, Massachusetts Governor Charlie Baker signed H.4647 into law. The law establishes a moratorium on foreclosures and evictions for 120 days from the date of the enactment, or 45 days after the COVID-19 Emergency Order is lifted, whichever is sooner, and also extends forbearance to any borrower who requests it due to COVID-19. The law allows the Governor to expand the foreclosure moratorium for a further 90 days, so long as it does not exceed the 45 day limit after the COVID-19 Emergency Order is lifted.