The Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. § 2605, regulates loan servicers and makes servicers liable for violations of and consumer-protection regulations promulgated under the act. In many cases, plaintiffs seek to hold banks and mortgage owners—so called “principals”—vicariously liable for a servicer’s violations of RESPA. That theory has met with some success in federal district courts, which are divided on the question (see Benner v. Wells Fargo Bank, N.A., which discusses the split of authority and joining minority of district courts that allow “vicarious liability” claims under RESPA). Though the theory has been pursued and discussed in district court opinions for at least eight years, no federal appellate court had addressed the issue of vicarious liability under RESPA – until now.
In December 2018, the U.S. Court of Appeals for the Fifth Circuit rejected the “vicarious liability” theory under RESPA, becoming the first—and, to date, only—circuit court to address the issue. In Christiana Trust v. Riddle, the plaintiff—facing a judicial foreclosure suit—alleged that her mortgage servicer, Ocwen Loan Servicing, LLC, had violated loss-mitigation regulations promulgated by the Bureau of Consumer Financial Protection pursuant to RESPA. The plaintiff also alleged that Bank of America, N.A., the mortgage holder, was vicariously liable for Ocwen’s alleged RESPA violations. The district court dismissed the RESPA claims against Bank of America, and the Fifth Circuit affirmed.
The Fifth Circuit rejected the vicarious liability theory based on a plain reading of RESPA, which imposes duties only on loan “servicers.” The court reasoned that Congress could have imposed liability broadly on “whoever fails to comply or whoever has hired an agent who fails to comply” with RESPA, but Congress specifically limited RESPA’s obligations to “servicers” and restricted liability to “whoever fails to comply with any provision of [the Act].” Only servicers, the court reasoned, can fail to comply with the act. In reaching its conclusion, the Fifth Circuit expressly rejected the rationale of Rouleau v. US Bank, N.A., which is the leading case adopting vicarious liability under RESPA. In the Fifth Circuit’s view, Rouleau’s view that Congress incorporated ordinary tort rules, including broad vicarious liability rules, into RESPA was refuted by Congress’s decision to expressly limit liability to the person who actually fails to comply with the act—the servicer alone.
While the Fifth Circuit’s decision in Christiana Trust does not resolve the nationwide split of authority on the RESPA vicarious liability issue, it could spell the end of the theory’s advancement. For starters, the decision is binding precedent that forecloses vicarious liability claims in three states, including Texas—the second most populous state in the country. And because circuit court opinions are persuasive authority in district courts outside of the circuit, the Fifth Circuit’s rejection of the vicarious liability theory may make district courts around the country more hesitant to embrace it—effectively locking the theory into an extreme minority position.