BuckleySandler LLP: Ninth Circuit Holds RESPA Does Not Apply to Loans Used to Purchase Rental Properties

BuckleySandler LLP: Ninth Circuit Holds RESPA Does Not Apply to Loans Used to Purchase Rental Properties

Excerpted from Infobytes, a weekly electronic newsletter on developments in financial services law from BuckleySandler LLP. For the full issue of Infobytes, click here: http://www.buckleysandler.com/infobytes/issues/infobytes_march_4_2011/

On February 15, the U.S. Court of Appeals for the Ninth Circuit held that a claim under the Real Estate Settlement Procedures Act (RESPA) did not stand where the mortgage loans in question were used to purchase rental properties. Johnson v. Wells Fargo Home Mortgage, No. 09-16815 (9th Cir. Feb. 15, 2011).  In Johnson, the borrower was a real estate professional who purchased properties, refurbished them, and then rented or sold them. The dispute began when the borrower sent mortgage payments on two loans to his servicer but inadvertently noted that both payments were to apply to the same loan. Consequently, the other unpaid loan became delinquent, leading to the commencement of foreclosure proceedings. The borrower's credit was ruined which in turn negatively impacted his various real estate business ventures. The borrower filed suit, claiming common law negligence, as well as violations of RESPA, the Fair Credit Report Act (FCRA) and the Fair Debt Collection Procedure Act.  By way of summary judgment, the servicer prevailed on all but the FCRA claim. The parties thereafter stipulated to binding arbitration on that claim and the arbitrator found for the borrower. The servicer appealed. The District Court denied the servicer's appeal of the arbitration award, finding that the parties' arbitration agreement stipulated that the parties would appeal arbitrator decisions directly to Ninth Circuit. Both parties appealed--the servicer on the arbitrator's award and borrower on the grant of summary judgment.  The Ninth Circuit rejected the direct appeal of the arbitration award and held that under the Federal Arbitration Act, the District Court should have first reviewed it.  Accordingly, it was remanded back for review. The Court also addressed the grant of summary judgment on the RESPA and common law negligence claims. With respect to the RESPA claim, the Court noted that RESPA does not "apply to credit transactions involving extensions of credit . . . primarily for business . . . purposes." The Court then looked to the corresponding federal regulations and their accompanying commentary and determined that non-owner occupied rental property constitutes a business purpose loan under RESPA. The Court remanded the borrower's negligence claim back to the District Court because that Court's holding that FCRA pre-empted part of the borrower's negligence claim was premised on   violations of FCRA, even though the Ninth Circuit found that the borrower made no such allegations. For a copy of the opinion, please see http://www.ca9.uscourts.gov/datastore/opinions/2011/02/15/09-15937.pdf.  

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