Banking Law Alert: Forclosure Practices Violated WA Consumer Protection Act

On February 28, 2013, the Washington Supreme Court issued its decision in Klem v. Washington Mutual Bank,, holding the practices of the WaMu and Quality Loan Service Corporation of Washington (“Quality”) violated the Consumer Protection Act (CPA).  Quality had trained its employees to falsify the execution dates of foreclosure documents with the apparent purpose of expediting the foreclosure process.  Additionally, WaMu and Quality had entered into an agreement that provided Quality was not to authorize postponements of the foreclosure sales without prior authorization of WaMu or its agents.  In practice, Quality refused to consider requests for delaying foreclosure sales and referred such requests to WaMu.

Persons asserting a claim under the CPA must meet several elements, but the primary issue in many cases is whether the practices or acts of the defendant are “unfair or deceptive.”  The legislature can and does expressly state that violations of certain statutes are also unfair or deceptive acts or practices such that a person injured may assert a statutory violation creates a claim under the CPA.  In Klem, the Supreme Court held violations of the state’s notary laws and, more surprisingly, an agreement by the trustee to act as the agent of the beneficiary constituted unfair or deceptive acts or practices as a matter of law.

In a judicial foreclosure proceeding, the trial court is charged with the responsibility of being an impartial arbitrator of the law.  In non-judicial foreclosure proceedings, the trustee has the obligation to impartially apply the law.  In 1975, the Washington legislature removed the prohibition of agents acting as trustees.  The Court in Klem refused to interpret such act as an implicit authorization.  Therefore, lenders who have an agency relationship or similar relationship with the trustee run a substantial risk of violating the CPA.

In light of the Klem decision, Lenders must evaluate whether they currently have an agency relationship or similar relationship with their trustee and review all agreements with their trustees to ensure they do not obligate the trustee to act in an impartial manner.  Further, Lenders must ensure the practices and communications of their officers do not evidence a tacit agreement between the Lender and the trustee.  Finally, Lenders should consider what due diligence and oversight of their trustees are currently implemented.