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California Appeals Court Enjoins Nonjudicial Foreclosure for Lenders' Failure to Comply with HUD Servicing Requirements
On December 13, the California Court of Appeal for the First Appellate District held that the HUD servicing requirements were incorporated by reference into the borrowers’ FHA deed of trust and served as conditions precedent to the acceleration of the debt or to foreclosure. Pfeifer v. Countrywide Home Loans, No. A133071, 2012 WL 6216039 (Cal. Ct. App. Dec. 13, 2012). In this case, after the lender declared the borrowers’ FHA-insured mortgage in default and commenced nonjudicial foreclosure proceedings, the borrowers filed suit against the lender seeking general and punitive damages, as well as to enjoin the foreclosure proceedings and to obtain declaratory relief, for failure prior to provide the 30-day advance debt validation notice required by the Fair Debt Collection Practices Act (FDCPA) or to conduct a face-to-face interview required by HUD’s servicing regulations prior to commencing foreclosure proceedings. On appeal, the court affirmed the lower court’s ruling that the borrowers did not have a claim for damages against the collection firm under the FDCPA, because that firm was not a debt collector under the statute. However, the court reversed the trial court’s judgment as to the borrowers’ request for injunctive relief based on their wrongful foreclosure claim and their request for declaratory relief. The court agreed with the borrowers that the deed of trust incorporates by reference the servicing requirements of HUD, including the face-to-face interview, and the lenders had to comply with the servicing terms prior to commencing a valid nonjudicial foreclosure. The court also held that tender was not required, because the borrowers were seeking to enjoin a pending foreclosure sale based on the lenders’ failure to comply with the HUD servicing requirements. Concurring with those courts that distinguish an offensive action from a defensive action, the court explained that the borrowers had no private right of action for failure to comply with the HUD regulations and could not seek damages based on their wrongful foreclosure action, but held that the HUD regulations may be used as an affirmative defense to a judicial foreclosure action instituted by the creditor.
CFPB Announces First Partnership with a City Government, Highlights Chicago's Consumer Financial Protection Efforts
On December 5, CFPB Director Richard Cordray and Chicago, IL Mayor Rahm Emanuel announced an agreement to share consumer financial protection information and resources. According to Director Cordray, the partnership will allow the CFPB to learn from and expand on the ways Chicago protects its consumers, and help the CFPB determine where it should be focusing its attention by allowing the CFPB to better understand consumer protection challenges that arise locally. The partnership also will allow the city to leverage new resources and information developed by the CFPB. In his statement regarding the partnership, Mayor Emanuel highlighted the city’s recent consumer financial protection initiatives, including (i) the planned introduction of a new City Council ordinance to regulate and license debt collectors, (ii) information gathering on predatory and deceptive acts associated with home repair loans, payday loans, small dollar loans, reverse mortgage products, and mortgage origination and servicing, (iii) new zoning regulations to limit the proliferation of payday lenders, auto-title loan stores, and other predatory financial services, and (iv) the planned introduction of a new ordinance to enhance the Department of Business Affairs & Consumer Protection’s ability to take action against businesses convicted of violating state and federal consumer protection acts.
State Law Update: Massachusetts Proposes Loan Servicing and Debt Collection Rules, Announces Public Hearing
Recently, the Massachusetts Division of Banks issued proposed amendments to the state’s rules governing the conduct of debt collectors and loan servicers. The proposed rule would (i) prohibit third-party mortgage servicers from initiating a foreclosure when an application for a loan modification is in process, (ii) require that servicers ensure that a creditor has the right to foreclose and that any foreclosure-related documents are properly prepared and executed based on personal knowledge, and (iii) mandate that third-party servicers provide a single point of contact for a borrower, follow detailed loan modification procedures, and communicate with borrowers in a timely manner under the new regulations. The amendments also would, amongst other changes, (i) amend the definition of "debt collector" to include active debt buyers, (ii) clarify the definition of net worth for debt collectors, (iii) expand the limitations on contact with a consumer by a debt collector to include cellular telephone and text messaging and (iv) expand the number of significant events of a debt collector and third party loan servicer which must be reported. The Division will host a public meeting about the proposed amendments on November 29, 2012, and will accept written comments through December 6, 2012.
CFPB Finalizes Debt Collector "Larger Participant" Rule
On October 24, the CFPB issued a final rule that will allow the Bureau to supervise certain debt collectors. Under this rule, debt collectors will be required to provide certain disclosures, provide accurate information, maintain a consumer complaint and dispute-resolution process, and communicate civilly and honestly with consumers. Beginning January 2, 2013, the CFPB will be able to examine and take enforcement actions against any entity that has more than $10 million in annual receipts from consumer debt collection activities. The CFPB anticipates that the rule will cover approximately 175 third-party debt collectors, debt buyers, and collection attorneys. The final rule retains the proposed annual receipts threshold used to identify “larger participants” but excludes from the definition of annual receipts those receipts that result from collecting debts originally owed to a medical provider. The final rule also limits covered consumer debt collection activities to those conducted by “debt collectors,” which are defined as persons whose principal business activity is debt collection or that “regularly” engage in debt collection. The CFPB declined to provide a blanket exemption to attorneys, as some commenters argued was required by the Dodd-Frank Act. Concurrent with the release of the final rule, the CFPB published procedures for use in examining covered debt collectors. This rule is the second “larger participant” rule, and it follows the July 2012 consumer reporting rule. The Dodd-Frank Act requires the CFPB to promulgate a rule to define “larger participant” nonbanks in certain consumer financial services markets.
Ninth Circuit Upholds Class Certification in TCPA Case
On October 12, the U.S. Court of Appeals for the Ninth Circuit upheld provisional class certification for a plaintiff debtor, who claimed that a debt collector had violated the Telephone Consumer Protection Act (TCPA) by using an automatic dialer to place calls to plaintiff and other debtors’ cellular telephone numbers obtained via skip-tracing, and where the debtors also had not expressly consented to be called. Meyer v. Portfolio Recovery Assocs. LLC, No. 11-56600, 2012 WL 4840814 (9th Cir. Oct. 12, 2012). The debt collector argued, in part, that typicality or commonality issues should preclude class certification because some debtors might have agreed to be contacted at their telephone numbers, which were obtained after the debtors incurred the debt at issue. Citing a recent FCC declaratory ruling, the court noted that prior express consent is deemed granted only if the debtor provides a cellular telephone number at the time of the transaction that resulted in the debt at issue. The court thus rejected the debt collector’s argument, and held that debtors who provide their cellular telephone numbers after the time of the original transaction are not deemed to have consented to be contacted under the TCPA. In addition, the court upheld the district court’s grant of a preliminary injunction to the plaintiff, finding that he had established a likelihood of success on his TCPA claim and had demonstrated irreparable harm based on the debt collector’s continuing violations of that statute.
Second Circuit Applies "Least Sophisticated Consumer" Test In Student Loan Debt Collection Case
On August 30, the U.S. Court of Appeals for the Second Circuit held that a debt collector’s representation to a debtor that her student loans were “ineligible” for bankruptcy discharge is a “false, misleading, or deceptive” debt collection practice in violation of the FDCPA. Easterling v. Collecto, Inc., No. 11-3209, 2012 WL 3734389 (2nd Cir. Aug. 30, 2012). The debt collector sent a collection letter to the debtor with a notice that the account was ineligible for bankruptcy discharge. The debtor sued the collector on her own behalf and on behalf of nearly 200 borrowers who also received such notices. The district court granted summary judgment in favor of the debt collector, concluding that because the debtor had previously filed for bankruptcy without seeking to discharge her student loan debt, and because student loan debt is presumptively non-dischargeable, her debt was, in fact, not eligible to be discharged. The appeals court disagreed and held that the district court erred in focusing on the borrower’s circumstances instead of applying the “least sophisticated consumer” standard. In applying that standard on appeal, the court reasoned that while the bar for bankruptcy discharge is high, it is not impossible and the “least sophisticated consumer” might not seek the advice of counsel for pursuing discharge through bankruptcy after receiving the debt collector’s inaccurate notice. The court held that the debt collector’s notice did violate the FDCPA and reversed and remanded the case for further proceedings.
Eleventh Circuit Holds Loan Servicer May Be Debt Collector Subject to FDCPA
On July 18, the U.S. Court of Appeals for the Eleventh Circuit held that a mortgage servicer may be a debt collector subject to the FDCPA where it attempts to both enforce a security interest and collect a debt. Birster v. American Home Mortgage Servicing, Inc., No. 11-13574, 2012 WL 2913786 (11th Cir. July 18, 2012). The borrowers alleged that the servicer harassed them with phone calls and home inspections in connection with trying to collect mortgage payments. The district court granted summary judgment to the servicer, holding that the servicer’s actions constituted efforts to enforce a security interest, and not to collect a debt. As such, the borrower’s claims under the FDCPA could not survive. The appellate court reversed and remanded, relying on its decision in Reese v. Ellis, Painter, Rattertree & Adams, LLP, No. 10-14366, 2012 WL 1500108 (11th Cir. May 1, 2012), which came after the district court ruled in favor of the servicer, and which provides that an entity can both enforce a security interest and collect a debt. The court held that the borrowers sufficiently alleged facts to support a claim under the FDCPA, citing a letter the servicer sent in which it stated that it was attempting to collect a debt.
FTC Settles Privacy, Data Security Charges Based On Peer-to-Peer File Sharing Against Two Firms
On June 7, the FTC announced two new cases (and simultaneous settlements), one against a debt collector and the other against an auto dealer, alleging privacy and data violations based on the use of peer-to-peer file sharing software. In both cases, the FTC claims that the firms allowed file-sharing software to be installed on company computers, thereby allowing files containing personal customer information to be accessed by any other person using a networked computer. Both companies, according to the FTC, (i) did not have adequate security plans, (ii) did not use reasonable measures to enforce compliance with existing security policies, (iii) did not adequately train employees, (iv) did not use reasonable methods to prevent, detect and investigate unauthorized access to personal information on its networks, and (v) failed to assess risk to consumers. For the debt collector, the FTC alleges that the failures constituted an unfair act or practice in violation of the FTC Act. The FTC claims that the auto dealer also violated the FTC Act and, for the first time, charges an auto dealer with violations of certain Gramm-Leach-Bliley (GLB) Act rules. The settlement orders with both companies bar misrepresentations regarding the privacy, security, confidentiality, and integrity of any personal information and require that the firms establish comprehensive information security programs that will be audited every other year for 20 years. The auto dealer also is barred from violating the GLB rules at issue.
Seventh Circuit Holds TCPA Prohibits Automated Calls to Cell Phones without Consent from Current Subscriber
On May 11, the U.S. Court of Appeals for the Seventh Circuit held that the Telephone Consumer Protection Act (TCPA) requires consent from a current cell phone subscriber to receive automated calls – even if a former subscriber to the same number had previously given consent to be contacted. Soppet v. Enhanced Recovery Company, LLC, No. 11-3819, 2012 WL 1650485 (7th Cir. May 11, 2012). The court affirmed a district court decision certifying a class of consumers who alleged that their cell phones were automatically dialed in violation of TCPA. The defendant debt collectors argued that it was not a violation of the TCPA to call a cell phone number if a previous subscriber to that number had given the consent required by the TCPA because the previous subscriber was the “intended recipient” of the call. The court rejected this argument because, even though the TCPA does not define who the “called party” is that must consent to be contacted, its use throughout the TCPA indicates that “called party" refers to the currently subscribed cell phone user, and not to any previous user.
Eleventh Circuit Court of Appeals Finds that "Dunning" Notice Enforcing a Security Interest May Give Rise to FDCPA Claim
On May 1, the U.S. Court of Appeals for the Eleventh Circuit reversed and remanded a lower court’s dismissal of an FDCPA claim, finding that the contents of a “dunning” notice from the lender’s foreclosing law firm constitutes an attempt to collect a debt under the FDCPA. Reese v. Ellis, Painter, Rattertree & Adams, LLP, No. 10-14366, 2012 WL 1500108 (11th Cir. May 1, 2012). The borrowers received a letter and documents from the lender’s law firm demanding payment of the debt on the borrowers’ defaulted mortgage loan and threatening to foreclose on their home if they did not pay the outstanding debt. The borrowers filed a class action lawsuit against the law firm alleging that the communication violated the FDCPA. The district court dismissed the complaint for failure to state a claim under the FDCPA. On appeal, the court held that the borrowers’ obligation to pay off the promissory note, which the court distinguished from a security interest, represents a debt under the FDCPA. The court then rejected the law firm’s argument that the purpose of the letter and accompanying documents was not to collect a debt, but rather to inform the borrowers of the lender’s intent to enforce its security interest through possible foreclosure. The court determined that the documents at issue, which contained disclaimers such as “This law firm is acting as a debt collector attempting to collect a debt,” had a dual purpose of providing notice of foreclosure and collecting a debt. In so holding, the court noted that following the law firm’s reasoning would create a giant loophole in the FDCPA wherein the law only would apply to efforts to collect on unsecured debt and would permit collectors to “harass or mislead [secured] debtors without violating the FDCPA.”