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Financial Services Law Insights and Observations

Federal Appeals Court Finds Plaintiff States FDCPA Claim Against Servicer, Creditor When Acquiring Debt Purportedly in Default

FDCPA Mortgage Servicing Debt Collection

Consumer Finance

On April 30, the U.S. Court of Appeals for the Sixth Circuit held that a mortgage servicer and a creditor can be sued as a debt collector under the Fair Debt Collection Practices Act (FDCPA) when acquiring a debt in default at the time of acquisition. The plaintiffs, a borrower and her non-borrower husband, alleged that the servicer and creditor violated the FDCPA in attempting to collect from the borrower and her husband, notwithstanding that the mortgage was not in default and despite plaintiffs’ repeated requests the servicer cease further communication. The servicer argued that it could not be liable under the FDCPA based upon its status as a mortgage loan servicer and because the debt was not actually in default. Similarly, the creditor argued that as the purchaser of the debt it could not be a debt collector and that it was neither a debt collector nor a creditor under the circumstances of the case. The district court, assuming plaintiff’s allegations that the servicer was not a servicer and that the creditor was not a creditor for purposes of the motion to dismiss, granted the motion on the basis that neither the servicer nor owner was a debt collector under the FDCPA. On appeal, the court, relying on congressional intent and previous decisions from the Third and Seventh Circuits, held that an entity that acquires a debt it seeks to collect must be either a creditor or a debt collector, depending on the status of the debt at the time it was acquired. Similarly, the court held the servicer may be either a servicer or debt collector when acting on behalf of the debt-acquiring entity. To hold otherwise, the court reasoned, would frustrate the purpose of the FDCPA’s broad consumer protections. Further, the court held that after years of attempting to collect on the debt and acting as a debt collector, the servicer could not now attempt to defeat the broad protections of the FDCPA by relying on the borrower’s assertion that the loan was not actually in default. Finally, the court rejected the defendants’ claims that the plaintiff-husband failed to state a claim since he was not actually obligated on the debt in light of the FDCPA’s application to debt collectors when attempting to collect a debt “owed or due or asserted to be owed or due another.” The appellate court reversed and remanded the case for further proceedings.

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