California Court Holds as Matter of First Impression that RESPA Prohibits Lender from Marking Up Costs of Another Provider’s Services Without Providing Additional Services of its Own
Plaintiffs filed a putative class action lawsuit against Washington Mutual Bank in California state court alleging inter alia violations of California’s unfair competition laws (UCL), Consumers Legal Remedies Act (CLRA), and breach of contract. “The basis of all causes of action was defendants’ overcharging plaintiffs for underwriting, tax services, and wire transfer fees in conjunction with home loans. Defendants charged plaintiffs more for these services than defendants paid the service providers.” McKell v. Washington Mutual Bank, ___ Cal.App.4th ___, 2006 WL 2664130 (Cal.App. September 18, 2006) [Slip Opn., at 2]. Plaintiffs’ UCL claim was premised upon alleged violations of the California Residential Mortgage Lending Act (CRMLA) and the federal Real Estate Settlement Procedures Act (RESPA) and Regulations X, among other state and federal laws. Slip Opn., at 5. The trial court granted a defense motion to dismiss the class action complaint, presumably on the ground that the claims “turn on the alleged existence of an agreement requiring Washington Mutual to charge no more than pass-through costs for underwriting, tax services, and wire transfers,” id., at 3, which plaintiffs could not do. The California Court of Appeal affirmed in part and reversed in part. We do not here discuss those aspects of the trial court’s ruling that the divided appellate court opinion affirmed. Rather, we focus on the Court of Appeal’s holdings that plaintiffs had adequately pleaded UCL and breach of contract claims.
The appellate court first held that the trial court did not err “in requiring plaintiffs to plead a factual basis for implying an agreement by [the Bank] to charge only pass-though costs,” Slip Opn., at 8. But in analyzing the UCL claims, the Court of Appeal explained at page 10,
A cause of action for unfair competition under the UCL may be established “‘independent of any contractual relationship between the parties.’” … Thus, the determination whether plaintiffs have stated a cause of action for violation of the UCL is not dependent upon their ability to plead the existence of an implied agreement to charge only pass-through costs for underwriting, tax services and wire transfer services.” (Citations omitted.)
Plaintiffs’ fraudulent business practices claims survived demurrer because “a reasonable consumer likely would believe that fees charged in connection with a home mortgage loan bore some correlation to services rendered.” Slip Opn., at 11. The Court rejected the Bank’s argument that Regulation X “only requires that the HUD-1 statement itemize the charges imposed on the buyer and seller” because listing the charge “does not preclude a finding [that] it is deceptive.” Id. (citations omitted).
Plaintiffs’ unfair business practices allegations also survived demurrer because “the determination whether [a business practice] is unfair is one of fact which requires a review of the evidence from both parties” and “thus cannot usually be made on demurrer.” Id., at 12. The Court of Appeal rejected the Bank’s judicial abstention argument because the Court was “doing no more than enforcing already-established economic policies.” Id., at 13. The Court rejected also the Bank’s argument that the Court “should not interfere” because “lending practices are strictly regulated” because plaintiffs are not challenging the amount of the fees per se but rather the business practice of “lead[ing] borrowers to believe it is charging them for the cost of certain services it provides, when in reality it is charging them substantially in excess of such costs.” Id., at 13-14.
Turning to the RESPA claim, the Court of Appeal quoted at length from Kruse v. Wells Fargo Home Mortgage, Inc., 383 F.3d 49 (2d Cir. 2004), Slip Opn., at 16 et seq. Kruse analyzed HUD’s interpretation of section 8(b) and concluded that it “prohibits a ‘“settlement service provider” from “mark[ing]-up the cost of another provider’s services without providing additional settlement services.”’” Id., at 19 (quoting Kruse, at 61-62). As a matter of first impression, the California appellate court agreed with Kruse and “adopt[ed] that court’s reasoning as our own.” Id. In accepting HUD’s interpretation of section 8(b), the Court also noted that “its interpretation of section 8(b) is consistent with Congress’s stated intent to protect consumers from unnecessarily high settlement charges.” Id., at 20 (citation omitted).
The Court rejected defense arguments that RESPA and Regulation X expressly preempt state law claims alleging violations of RESPA and Regulation X, Slip Opn., at 21-24, and additionally rejected defense claims that plaintiffs’ claims were preempted by the federal Home Owners’ Loan Act (HOLA), 12 U.S.C. § 1461 et seq., id., at 24-31. With respect to the HOLA preemption claim, the appellate court observed that “plaintiffs are not attempting to employ the UCL to enforce a state law purporting to regulate the lending activities of a federal savings association” but rather “to enforce federal law governing the operation of federal savings associations.” Id., at 27. As the Court explained at page 29,
Insofar as plaintiffs are using the UCL to enforce federal laws as set forth in RESPA, they are not seeking to enforce “state laws affecting the operations of federal savings associations.” (§ 560.2(a).) The UCL does not “purport to regulate or otherwise affect [a savings’ association’s] credit activities” (ibid.) but only provides a means of enforcing federal requirements. It is thus the type of state law not preempted by federal law. [Citations.]
With respect to the breach of contract claim, the appellate court admitted that “[p]laintiffs have still failed to identify the contract and contractual provision under which [the Bank] required them to pay underwriting and wire transfer costs” but that they identify the deed of trust for the fee for tax services. Slip Opn., at 32. The Court agreed that “[t]he deed of trust … required that any tax services fee [the Bank] charged plaintiffs comported with RESPA,” id., at 33. Because plaintiffs alleged the fee violated RESPA, they adequately pleaded a breach of contract claim so as to survive demurrer. Id.
NOTE: The Court of Appeal had no trouble in affirming the dismissal of the CLRA claim: “Plaintiffs cite no authority or make no argument demonstrating that Washington Mutual’s actions were undertaken ‘in a transaction intended to result or which results in the sale or lease of goods or services.’ … Rather, its actions were undertaken in transactions resulting in the sale of real property. The CLRA thus is inapplicable … ” Slip Opn., at 31 (citation and footnote omitted). The Court also affirmed dismissal of the common law claims for unjust enrichment, bailment, and conversion, id., at 33-35.
One of the appellate court judges issued a concurring and dissenting opinion in which he expressed the view that “this entire action is preempted by federal law,” specifically, the Home Owners’ Loan Act (HOLA). Slip Opn., Vogel, J., concurring and dissenting, at 4.
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