Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—E.D. Cal.: Mortgage company may be liable for unfair business practices, (Mar 5, 2015)

By Dan Selcke, J.D.

A pair of homeowners sufficiently alleged that their mortgage company engaged in unfair business practices, the federal district court in Fresno, California held, because its conduct violated a law that prohibited companies from purchased unnecessary lender-placed insurance (LPI) (Gomez v. Nationstar Mortgage, LLC, March 4, 2015, McAuliffe, B).

Geno and Maria Gomez entered into a contract to obtain a mortgage loan for the purchase of their home. Years later, the loan was transferred to defendant Nationstar Mortgage, LLC. A few months after the transfer, Nationstar called the homeowners and alleged that they failed to maintain a current home owner’s insurance policy on their property. The Gomezes claimed that they did have a current policy, and allegedly submitted documentation to Nationstar that proved it. Nevertheless, Nationstar purchased an LPI policy (also called a forced-place insurance policy) on the property and shifted the costs to the home owners. After Nationstar admitted it had made a mistake, it sent a refund check for the LPI policy payments. The refund allegedly did not make up for all of the money paid erroneously to Nationstar.

A little less than two years after receiving the refund, the Gomezes stopped making their mortgage payments because they believed that the payments were not being applied correctly. A few months later, Nationstar notified them that it intended to foreclose on their property. The Gomezes requested that Nationstar properly credit their mortgage account as a result of the LPI policy, but their requests were largely ignored. The Gomezes alleged, among other things, that Nationstar violated the Real Estate Settlement Procedures Act (RESPA) and engaged in both unfair and fraudulent business practices in violation of California’s Unfair Competition Law (UCL). Nationwide filed a motion to dismiss.

Unfair practices. In California, conduct is unfair under the UCL if (1) the alleged unfairness was “tethered to some legislatively declared policy,” or (2) “when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers” and the utility of that conduct was outweighed by the harm to the consumer. Davis v. HSBC Bank Nevada, N.A., 691 F.3d 1152, 1169-71 (9th Cir. 2012).

Tethering test. The homeowners tried to tether their unfair practices UCL claim to a policy set out in a 2014 amendment to RESPA that prohibited mortgage services from “obtain[ing] force-placed hazard insurance unless there is a reasonable basis to believe the borrower has failed to comply with the loan contract’s requirements to maintain property insurance.” Nationwide’s actions clearly violated the amendment, but the company argued that the Gomezes could not tether their claims to it because the amendment was inapplicable to events that occurred before it was enacted, which included Nationwide’s actions as described in the Gomezes’ suit.

The court disagreed with Nationwide. All the Gomezes needed to show, it reasoned, was that Nationwide’s conduct was “comparable to or the same as a violation” of an establish law, not that it met all the procedural requirements of that law. Various courts had, for example, held that a UCL claim that would have fallen outside the statute of limitations of the law it was tethered to could nonetheless proceed under the four-year UCL statute of limitations. Similarly, the Gomezes could bring their UCL unfair practices claim so long as they could show that Nationwide had violated the RESPA amendment, even though the amendment would not have applied retroactively were they bringing an actual RESPA claim. As already discussed, Nationwide’s actions violated the RESPA amendment, so the Gomezes’ UCL claim could proceed under the tethering test.

Balancing test. The court also held that the Gomezes alleged enough facts to state an unfair business practice claim under the balancing test. Specifically, they alleged that Nationwide had arranged matters so that they had to pay the company for costly, unnecessary insurance, a situation that benefitted no one but Nationwide. This was enough to convince the court that Nationwide had engaged in conduct that was “immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers,” at least at the lenient motion to dismiss stage.

Fraudulent practices. Although the Gomezes had sufficiently alleged that Nationwide had engaged in unfair practices under the UCL, the court held that they had not sufficiently alleged that it had engaged in fraudulent practices. The Gomezes’ UCL claim was comprised of conclusory and vague allegations that did not meet the heightened pleading standard imposed by Federal Rule of Civil Procedure 9(b). To the extent that the UCL claim was predicated on fraud, it was dismissed.

The case is No. 1:14-cv-1499.

Attorneys: Catarina Maria Benitez (Law Offices of Catarina M. Benitez) for Geno Gomez. Mary Kate Sullivan (Severson & Werson, PC) for Nationstar Mortgage, LLC.

Companies: Nationstar Mortgage, LLC

Cases: StateUnfairTradePractices CaliforniaNews