Consumer Finance Insights
March 20, 2017

Ninth Circuit Affirms Dismissal of Default Servicing Class Action

Last month, the Ninth Circuit affirmed dismissal of a putative class action that challenged certain fees imposed for property inspections conducted after the named plaintiffs had defaulted on their mortgages. Demonstrating the value of the increased pleading requirements set by Federal Rule of Civil Procedure 9, the Ninth Circuit’s decision in Vega v. Ocwen Financial Corp. Case No. 15-555885, will assist financial services defendants facing fraud claims in connection with default servicing obligations.

In Vega, the defendant, Ocwen, charged the plaintiffs for property inspections conducted after the plaintiffs defaulted on their loans.  The plaintiffs had agreed in their standard form mortgage contract that their lenders and servicers could “charge the plaintiffs for property inspections that are ‘reasonable or appropriate’ to protect the lenders’ interest in the properties” and to pass those costs on to the plaintiffs.  Slip Op. at 4.  After the plaintiffs defaulted, Ocwen sent property inspectors out to the plaintiffs’ properties to ensure that the properties were occupied and maintained.  The plaintiffs sued Ocwen for this, alleging violations of RICO and the California Unfair Competition Law, among other violations.  The plaintiffs alleged that Ocwen had conspired to commit fraud by failing to disclose the allegedly unnecessary fees, and to support these claims, the plaintiffs claimed the inspections were ordered automatically, that they were too frequent, and that they went unreviewed.

Affirming dismissal, the Ninth Circuit concluded that these allegations did not support the plaintiffs’ fraud allegations, explaining that these allegations were insufficient because they did not create an inference that the inspections were not performed in accordance with the terms of plaintiffs’ mortgage contracts.  Default servicing organizations facing similar claims may find the reasoning in this opinion helpful in their own litigations, particularly where plaintiffs have included allegations of fraud in their suits.