From origination through final payoff, plaintiffs’ counsel look for claims in just about every aspect of the relationship between borrowers and their mortgage lenders. Recently, scrutiny has turned to property inspections carried out during default servicing. Plaintiffs’ lawyers have filed several class-action suits alleging that inspection fees violate mortgage terms, state law, and federal law.
Property inspections are an important part of default servicing because they are one of the primary means by which a servicer protects the lender’s security interest. Property inspections allow servicers to determine if a property becomes vacant, which is essential to preserving the value of the property as vacant homes tend to deteriorate more rapidly than occupied properties. Servicers also conduct property inspections to determine whether borrowers who still live in the property have begun to allow the property to deteriorate. For precisely these reasons, GSEs and other entities that insure or invest in loans require servicers to conduct regular property inspection. Likewise, many municipalities have passed laws that require lenders and servicers to maintain properties and notify the municipality when a property becomes vacant.
Plaintiffs in recent property inspection class actions have asserted two main theories. First, they claim that servicers impose property inspection fees and brokers’ price opinion fees too frequently and at times that are unnecessary to protect the lenders’ interests in the property. They also claim that lenders do not adequately disclose the nature of the charge on borrowers’ monthly loan statements.
Courts have granted motions to dismiss several of these class actions in lawsuits in California and Florida. By contrast, a case in Iowa survived dismissal and the court certified the suit as a class action, after which the servicer entered into a $25,750,000 settlement. Other such cases are pending in New York and California, and before the Ninth Circuit.
Although Defendants have had some success in defending against these suits, plaintiffs’ lawyers may well file more. Lenders should monitor the progress of these cases closely and review their property inspection programs and procedures.