Wednesday, January 19, 2011

The Importance of Context

If you're looking for a job, perhaps the courts could use you. About 15 years ago, my friend, David Stemler, and I wrote a book on the Real Estate Settlement Procedures Act (RESPA). That's the law that requires the "Good Faith Estimate" (GFE) of settlement costs you receive when you apply for a home loan, and the settlement statement (HUD-1 or HUD-1A) when the loan closes. Since the book was published, we've updated it 2 or 3 times per year. Back in the early years, it often was hard to find court decisions that dealt with RESPA -- 50 per year was a hefty number. That's no longer the case. I found nearly 500 cases decided between July 1, 2010 and January 2011.

RESPA imposes many other requirements. For example, it prohibits providers of the services involved in obtaining your loan (appraisals, brokers, lenders, real estate agents, pest inspectors, etc.) from paying money to each other unless services are actually rendered. For example, lenders can get into trouble if they give tickets for sporting events to real estate agents who refer loans. I've sometimes wondered if Congress ought to pass a similar law for health care -- for example, restrictions on drug companies flying physicians to Hawaii for classes on a newly approved pill.

RESPA also requires your mortgage loan servicer to respond in a timely manner to your "Qualified Written Request" for information about how it has applied your loan payments and any other questions relating to the servicing of your loan. To be a "Qualified Written Request," you must include specific information in your request (such as enough information to identify you, your loan and the information you want) and send it to the right address.

Consider this: You get a mortgage loan from a local bank, which chooses to service the loan instead of selling the servicing rights to some other company. A year and a half later, you notice your payments haven't been properly credited to your account, so you send a letter about this. RESPA requires your bank to answer you fairly quickly.

Now consider this: You get a mortgage loan from a local bank, which chooses to sell the servicing rights to another company. A year and a half later, you notice the same problem as in the previous paragraph -- your payments haven't been properly credited -- so you send the company a letter. According to a recent court decision -- wrong, I dare say, -- RESPA would allow that company to ignore your letter.

How did the judge come to this conclusion? He turned to a poorly drafted sentence in Regulation X, which implements RESPA: "[A] written request does not constitute a qualified written request if it is delivered to a servicer more than 1 year after either the date of transfer of servicing or the date that the mortgage servicing loan amount was paid in full, whichever date is applicable." Because the servicing company received your letter more than 1 year after the servicing rights were transferred to it, your letter wasn't a "Qualified Written Request" and, as a result, the servicer didn't have to respond.

"Well, I guess that makes sense," says Virginia, "after reading the sentence the court quotes, but the result doesn't make sense to me, the borrower."

It doesn't to me, either, and my money's on other courts disagreeing with this judge. I'm quite sure HUD intended the sentence to have a limited meaning -- referring only to a servicer that receives a letter after servicing has been transferred to another servicer. Otherwise, the response requirement would disappear for up to 29 years of a typical 30-year mortgage. (And Lenders that want to retain servicing might even transfer servicing for a few months and then get it back, in an attempt to escape the response requirement.)

A look at the RESPA statute suggests the judge is wrong. The statute clearly applies to the letter received more than a year after the servicing transfer. On the other hand, the statute gives HUD the authority to adopt regulations and exemptions, so one could argue that the quoted sentence amounts to an exemption. I imagine HUD, or the new Consumer Financial Protection Bureau, will clear this up before long.

By the way, if you want to send a letter to your lender or servicer, HUD offers a sample letter and guidance at

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