An implied cause of action under the Real Estate Settlement Procedures Act.

• Author: Sagers, Christopher L.

INTRODUCTION

John and Janet lived for most of their early years together in a townhouse in Manhattan. It was a rental, a two-story walk-up on the Upper West Side with barely enough room for the two of them, and it ate up most of their income so that they were barely able to save anything. "Wait a minute," John said one day, "we're paying almost as much for this dump as we'd pay for a mortgage on a nice house!" So the two of them looked over their finances. Not much there. A few thousand and a 401(k) at Janet's work. So John and Janet went to a bank -- the Shady Bros. Mortgage & Loan, up in Westchester. They were going to need a mortgage loan.

The house they picked out, like most mortgaged properties, was subject to various tax and insurance obligations.(1) When borrowers fail to meet these kinds of obligations, foreclosure is often an inadequate remedy for the lender because the property may be subject to liens superior to the mortgage.(2) For this reason, Shady Bros., like most real estate lenders, required John and Janet to make periodic deposits into an escrow account, from which charges like the tax and insurance payments could be paid.(3) The account, like most such accounts, was a savings account, the interest on which the bank retained.(4)

Escrow account programs like the one at Shady Bros. first appeared in the 1930s, at a time when widespread poverty and insolvency led thousands of banks across the nation to adopt similar protections.(5) Over the years, these accounts developed into a lucrative source of interest-bearing capital for mortgage lenders.(6) The practice went virtually unnoticed until the late 1960s, when borrowers in various states began to challenge the practice alternately as a violation of the Truth in Lending Act,(7) the antitrust laws,(8) and common law fiduciary duty, usury, fraud, and other doctrines.(9) When the consumer protection movement of the 1970s finally spurred Congress to enact legislation in this area, it passed the Real Estate Settlement Procedures Act of 1974 ("RESPA").(10) RESPA generally limits the ability of lenders to make certain kinds of charges and imposes on them an array of disclosure requirements.(11) Section 10 of the Act limits the amount that a lender may require a borrower to deposit in an escrow account.(12)

So, about six years after John and Janet bought the house, they decided they needed a home equity loan to do a little remodeling. But when they visited John's cousin for a little legal advice, she noticed something wry peculiar in the couple's first mortgage: it seemed that they were paying too much for the tax and insurance escrow -- way too much. They had always grumbled about that tedious bill, but in the face of their tremendous mortgage payment it had hardly seemed worth complaining about.

In many cases, of course, the individual overcharge may be comparatively small. The escrow payment, even when illegally inflated, will still normally represent only a fraction of the overall cost of mortgage financing.(13) The fact remains, however, that banks that violate section 10 engage in a practice harmful to consumers that Congress has determined should be unlawful. Moreover, whatever the impact on individual consumers, escrow accounts nationwide now represent a huge store of mortgage consumers' funds,(14) wrongful manipulation of which can result in harms of national scope.(15)

Unfortunately for John and Janet, and millions of home loan borrowers like them, section 10 is silent with respect to the remedy for a violation of the escrow payment limitation.(16) Therefore, borrower plaintiffs must argue that courts should recognize an implied cause of action udder that section.(17) Unfortunately for consumers, federal courts of appeals disagree as to whether such a private action exists.(18)

This Note contends that consumers should have a private damages action under section 10. Part I discusses the method federal courts currently employ to determine whether a private cause of action should be recognized under a given federal statute. Part II applies this standard to section 10, and it argues that, although the federal courts currently exhibit a fairly restrictive attitude toward implication of remedies an action should be implied under section 10 because RESPA was enacted at a time when Congress relied on a more permissive judicial implication doctrine. Finally, Part III contends that a private action for money damages is superior to other potential forms of enforcement.

1. IMPLIED RIGHTS OF ACTION UNDER FEDERAL STATUTES

   Since the mid-1970s, the Supreme Court has issued several opinions curtailing the power of the federal courts to fashion innovative remedies, even when to do so would further the interests Congress sought to protect. Thus, if RESPA were enacted in its present form today, a claim for an implied cause of action would probably fail.(19) However, the Court has recognized that the doctrine of implied actions was quite permissive for many years prior to the conservative turn of the 1970s -- some time after RESPA's passage. At the time Congress enacted RESPA, it likely was aware of the Court's prior precedents. As one commentator noted:

   If application of the new stricter test to statutes enacted when Congress

   most likely anticipated that the Court would apply the then-existing, broader

   approach produces different results on the question of implied liability,

   then one of two events must occur to reestablish the status quo ante:

   either, sue sponte, Congress must divert its attention from its own

   pressing legislative priorities to reinstitute the prior approach . . . or

   the people disadvantaged by this judicially initiated change in the status

   quo must bear the costs. . . .(20)

   The Supreme Court has recognized this problem and, as will be discussed more fully below,(21) has held that, as a general matter, the law that existed when a statute was enacted is relevant to its interpretation.(22) This Part therefore summarizes the law of implication as it existed when RESPA was passed and attempts to synthesize the various approaches of present-day federal courts interpreting statutes enacted at that time.

   For most of this century, the leading case on implied actions was Texas & Pacific Railway v. Rigsby.(23) In that case, the Supreme Court reasoned that "[a] disregard of the command of the statute is a wrongful act, and where it results in damage to one of the class for whose especial benefit the statute was enacted, the right to recover the damages from the party in default is implied."(24) Rigsby drew heavily upon British doctrines of implied tort liability based on criminal statutes.(25) Like the British courts, American courts adhered for the most part to the maxim ubi jus ibi remedium--where there is a right, there is a remedy.(26) Therefore, until the 1970s, courts focused almost exclusively on whether a private cause of action would serve the purposes of a statute.(27)

   A gradual redefinition of this standard began in the early 1970s amid growing dissatisfaction felt by certain members of the Court with existing standards for implied actions.(28) The Court's discontent came to an apparent head in 1975 in Cort v. Ash.(29) There a unanimous Court set forth a four-step inquiry to guide the analysis of implied cause of action questions.(30) Under Cort, courts asked to recognize an implied action should consider: (1) whether the plaintiff is a member of the class for whose especial benefit the statute was enacted; (2) whether there is an indication of legislative intent to create or deny an implied remedy; (3) whether a private cause of action is consistent with the underlying purposes of the legislative scheme; and (4) whether the cause of action is one traditionally relegated to state lawn.(31) While these factors purportedly did no more than distill the Court's existing jurisprudence, Cort is understood as a conservative milestone, marking the Court's clear break with the more permissive past.(32)

   Cort was nominally the leading implication decision for several years thereafter, but since it was decided, consensus on the implied right of action issue has broken down. In the ensuing years, the Supreme Court has made clear that federal courts should no longer feel free to provide remedies necessary to give effect to federal statutes. The courts instead must fulfill the clearly expressed intent of Congress, and only in exceptional cases may they look behind the language of a statute in order to determine that intent.(33) Some have taken these later decisions virtually to end the doctrine of implication,(34) and while it appears that "rumors about the death of the implied cause of action . . . are exaggerated,"(35) it is clear that plaintiffs now must overcome a high hurdle to convince federal courts to recognize implied private actions.

   However, whatever the Court's current attitude toward implied actions section 10's most important attribute for present purposes is its age -- RESPA was enacted more than twenty years ago. Prior to the narrowing Supreme Court decisions of the 1970s, Congress likely expected and relied on the federal courts to imply remedies. Congress may well have expected the courts to recognize a private cause of action for violations of section 10 automatically.

   While the Court's recent implied action jurisprudence has not been entirely clear, it has recognized the significance of congressional reliance on statutory interpretation precedents, and accordingly it has adjusted its interpretive attitude when considering statutes enacted prior to Cort. In Cannon v. University of Chicago,(36) the Court recognized an implied action under Title IX of the Education Amendments of 1972.(37) While the Court made clear that generally it will "adhere to the strict approach followed in . . . recent cases,"(38) it explained that such an approach is not appropriate for pre-1975 statutes.(39) The Court repeatedly emphasized that Title IX...