Court Dismisses Homeowners’ Force-Place Insurance Claims Under RESPA, FDCPA

A federal district court in Alabama has dismissed two homeowners’ force-place insurance-related claims against a lender and mortgage servicer under the Real Estate Settlement Procedures Act (RESPA) and the Fair Debt Collection Practices Act (FDCPA).

The Case

After homeowners obtained a loan secured by a mortgage on their property in Andalusia, Alabama, Bank of America determined that the property was in a Special Flood Hazard Area as shown on a map published by the Federal Emergency Management Agency (FEMA). Bank of America required that the homeowners purchase flood insurance on the property.

The homeowners contested the flood zone determination and did not purchase flood insurance. Bank of America purchased flood insurance for them and increased their monthly mortgage payments. The homeowners apparently did not make their monthly mortgage payments and Bank of America sent them a Notice of Intent to Accelerate and Foreclose. Bank of America then transferred the servicing rights of the homeowners’ account to Seterus, Inc.

Seterus notified the homeowners that their loan was in default and that it force-placed flood insurance on their property.

The homeowners sued Bank of America and Seterus, asserting claims for: 1) violation of RESPA; 2) unjust enrichment/money had and received; 3) breach of covenant of good faith and fair dealing; 4) breach of contract; 5) violation of the FDCPA; and 6) negligent and wanton hiring and supervision.

After removing the case to federal court, the defendants moved to dismiss.

The Mortgage

The mortgage stated:

Borrower shall keep the improvements now existing or hereinafter erected on the Property insured against loss by fire, hazards included within the term ‘extended coverage,’ and any other hazards including, but not limited to, earthquakes and floods, for which Lender requires insurance.... If Borrower fails to maintain any of the coverages described above, Lender may obtain insurance coverage, at Lender’s option and Borrower’s expense. Lender is under no obligation to purchase any particular type of insurance or amount of coverage. Therefore, such coverage shall cover Lender, but might or might not protect Borrower, Borrower’s equity in the Property, or the contents of the Property, against any risk, hazard or liability and might provide greater or lesser coverage than was previously in effect. Borrower acknowledges that the cost of the insurance coverage so obtained might significantly exceed the cost of insurance that Borrower could have obtained. Any amounts disbursed by lender under this Section 5, shall become additional debt of Borrower secured by this Security Instrument. These amounts shall bear interest at the Note rate from the date of disbursement and shall be payable, with such interest, upon notice from Lender to Borrower requesting payment.

(Emphasis added.)

The Court’s Decision

The court granted the defendants’ motions to dismiss the federal claims and remanded the case to state court to consider the homeowners’ state law claims.

First, the court rejected the homeowners’ claim that the force-placement of flood insurance constituted a “settlement service” under RESPA and that the defendants had violated RESPA by receiving prohibited kickbacks and unearned fees in conjunction with the force-placed insurance. The court found that because the flood insurance was force-placed after the close of their mortgage agreement, the homeowners’ claim had to be dismissed.

It also dismissed the homeowners’ claim for statutory damages under Section 10 of RESPA, finding that Section 10 of RESPA did “not provide plaintiffs a private cause of action.”

Next, the court rejected the homeowners’ claims under the FDCPA. The court ruled that Bank of America was not a debt collector under the FDCPA because the loan was not in default at the time Bank of America began servicing the loan. It also noted that the mortgage agreement explicitly authorized force-placement of insurance if required by the lender, at the borrowers’ expense, and concluded that even if, as the homeowners contended, the FEMA map incorrectly placed their property in a flood zone, Seterus had not used “false, deceptive or misleading representations” or “unfair or unconscionable means to collect a debt” when it represented that a FEMA map showed their property to be in a flood zone and that the National Flood Insurance Act required them to purchase flood insurance. The homeowners’ disagreement with the flood zone determination did not provide them with a vehicle to allege a violation of the FDCPA, the court ruled.

The court then found that its supplemental jurisdiction over the homeowners’ state law claims was inappropriate, and it remanded those claims back to Alabama state court.

The case is Davis v. Bank of America, No. 2:13–cv–231–WC (M.D.Ala. Oct. 17, 2013). Attorneys involved include: Allen Gerald Woodard, Woodard Law Firm, Andalusia, AL, for Plaintiffs; Anna L. Craft, Jason Robert Bushby, Bradley Arant Boult Cummings, LLP, Birmingham, AL, Austin E. James, RCO Legal, PC, Atlanta, GA, for Defendants.

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