Merchandising 101: Missouri Supreme Court Addresses Applicability of State’s Merchandising Practices Act to Mortgage Loan Servicers

Financial Services Litigation & Regulatory Compliance Alert

Client Alert


Two new en banc opinions from the Supreme Court of Missouri, both released on August 19, 2014, may be of interest to mortgage loan servicers with borrowers in this state. The opinions — Conway v. CitiMortgage, Inc., --- S.W.3d ----, 2014 WL 4086671 (Mo., 2014) and Watson v. Wells Fargo Home Mortg., Inc., --- S.W.3d ----, 2014 WL 4086486 (Mo., 2014) — represent a clear pronouncement on the scope of liability of mortgage servicers under the Missouri Merchandising Practices Act (the “MMPA”). The MMPA provides that “[t]he act, use or employment by any person of any deception, fraud, false pretense, false promise, misrepresentation, unfair practice or the concealment, suppression, or omission of any material fact in connection with the sale or advertisement of any merchandise in trade or commerce or the solicitation of any funds for any charitable purpose… in or from the state of Missouri, is … an unlawful practice.” Mo. Rev. Stat. § 407.020. 1. The opinions provide a good news/bad news story on the scope of this provision.

First, the Bad News

In Conway, the Court was faced with the threshold question of whether a mortgage loan servicer who did not initiate the loan in question can be held liable under the MMPA. The issue hinged on the statutory interpretation of the phrase “in connection with,” as used in the MMPA. More particularly, the Court had to determine whether services performed by a loan servicer are “in connection with” the making of the loan (the MMPA requires that the conduct be in connection with the original sale of the merchandise). Reversing the lower court’s dismissal of the action, the Court reasoned: “ Because a loan is an ongoing transaction, loan collection procedures, whether initiated by a loan originator or a loan servicer, are done ‘in connection with’ the original procurement of the loan ….” In other words, servicers who were not and/or are not loan originators may still be held liable for violations of the MMPA.

Now, the Good News

Having established the scope of the MMPA in Conway, the Court turned in Watson to the secondary question of whether allegations that a servicer acted in bad faith in loan modification negotiations could be liable under the MMPA. This attempt to extend the reach of the MMPA was, apparently, a bridge too far for the Court. Rejecting the claim, the Court held that “ because Wells Fargo was not enforcing the terms of the original loan when it negotiated the loan modification, its actions did not violate the MMPA as they were not ‘in connection with’ the sale of the original loan …”.

The Bottom Line

Mortgage loan servicers should be mindful of potential liability under the MMPA, even when they did not originate the loans they may be servicing for Missouri borrowers. However, the Supreme Court of Missouri does not appear willing to “open the floodgates” and allow the MMPA to become a catchall theory upon which borrowers may assert all forms of grievances and complaints against servicers.

Servicers should also remember that the MMPA does not apply to certain institutions, companies, or entities that are subject to chartering, licensing, or regulation by the Director of the state’s Department of Insurance, Financial Institutions, and Professional Registration. This exemption may prevent some servicers who maintain licenses in this state from falling under the “bad news” umbrella of the Court’s decision in Conway.