Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—5th Cir.: Mortgagors’ attempted modification of loan was outside the scope of the Texas Deceptive Trade Practices Act, (Aug 14, 2013)

By Peter Reap, J.D., LL.M.

James and Allene Miller, mortgagors who filed Texas Deceptive Trade Practices Act claims against BAC Home Loans Servicing (“BAC”) in connection with their attempted modification of the mortgage loan they obtained to acquire their property on Corey Drive in Whitehouse, Texas, did not qualify as “consumers” under the meaning of the Act, the U.S. Court of Appeals in New Orleans has decided (Miller v. BAC Home Loans Servicing, L.P., August 13, 2013, Stewart, C.). Therefore, the dismissal of their DTPA claims by the federal district court in Tyler, Texas, was affirmed.

Background. In December 2001, the Millers obtained a purchase money mortgage for the Corey Drive property from Nexstar Financial Corp (“Nexstar”). The mortgage note was secured by a deed of trust lien. Effective April 7, 2010, Nexstar assigned the note and lien to BAC, which proceeded to act as the loan servicer.

The Millers fell behind on their mortgage payments and on May 3, 2010, the Millers received a letter from BAC’s foreclosure law firm stating that a foreclosure sale of the property would occur on June 1, 2010. The Millers alleged that sometime between May 3, 2010, and May 18, 2010, a BAC foreclosure specialist named Victoria Masters informed them that she would make sure a loan modification application arrived, and that the foreclosure sale would be postponed while they attempted to modify their loan. The loan modification application arrived on May 18, 2010.

The Millers returned their completed application by mail on May 28, 2010. That same day, they were contacted by an agent of BAC who informed them that the foreclosure auction would proceed on June 1, 2010. On May 31, 2010, the Millers alleged Ms. Masters represented to them that she had obtained approval from Fannie Mae for foreclosure postponement pending disposition of their loan modification application.

Notwithstanding this alleged representation of postponement, the foreclosure sale proceeded as scheduled on June 1, 2010. The Millers filed suit on January 14, 2011, bringing claims under the DTPA, in addition to other claims, against BAC and another loan servicing entity.

The magistrate judge filed her report on March 23, 2012, in which she recommended that the district court dismiss all claims against both defendants. The district court proceeded to adopt the report upon de novo review and entered final judgment against the Millers on April 11, 2012. The Millers appealed.

DTPA. The magistrate judge rejected the Millers’ claims under the DTPA, explaining that the statute protects “consumers” and that mortgagors (loan borrowers) are not consumers within the meaning of the statute. The Fifth Circuit agreed that this was the general rule, but restated the test slightly differently to account for a necessary nuance.

The DTPA protects consumers; therefore, consumer status is an essential element of a DTPA cause of action, the appellate court noted. In order to qualify as a consumer under the DTPA, two requirements must be established. First, the person must seek or acquire goods or services by purchase or lease. Second, the goods or services purchased or leased must form the basis of the complaint.

Generally, a pure loan transaction lies outside the DTPA because money is considered to be neither a good nor a service. However, subsequent cases have limited this doctrine, the court explained. Therefore, a loan sometimes could constitute a basis for consumer status under the DTPA.

A mortgagor qualifies as a consumer under the DTPA if his or her primary objective in obtaining the loan was to acquire a good or service, and that good or service forms the basis of the complaint. Here, the Millers alleged that their mortgage was a purchase money loan, meaning they obtained it to acquire their property on Corey Drive. However, the purchase money loan did not form the basis of the Millers’ complaint; rather, the Millers’ DTPA claim against BAC was based entirely on their attempted modification of that loan, according to the court.

Such modification was akin to refinancing in that it was not sought for the acquisition of a good or service, but rather to finance an existing loan on previously acquired property, the court determined. See Ayers v. Aurora Loan Servs., LLC, 787 F. Supp. 2d 451, 455 (E.D. Tex. 2011) (“[A] modification of an existing loan . . . is analogous to refinancing services. Refinancing is simply an extension of credit that does not qualify Plaintiff as a consumer.”

As in Ayers, “[h]ere, the alleged loan modification was not a part of the financing scheme to acquire a house. It is an entirely separate and distinct transaction, sought after the purchase of the house was complete.” 787 F. Supp.2d at 455. The Millers’ complaint was therefore based on “a pure loan transaction,” meaning the Millers did not qualify as consumers under the DTPA. Thus, the district court’s dismissal of the Millers’ DTPA claims was affirmed.

The case is No. 12-41273.

Attorneys: Ralph Edwin Allen for James R. Miller. David Stewart Clancy (Akerman Senterfitt, L.L.P.) for BAC Home Loans Servicing, L.P.

Companies: BAC Home Loans Servicing, L.P.

Cases: StateUnfairTradePractices LouisianaNews MississippiNews TexasNews