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

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.

FDCPA Mortgage Servicing Debt Collection

Senators Push for CFPB Action on Payday Lending, Propose Federal Legislation

On March 12, Senators Jeff Merkley and Daniel Akaka released a letter sent to CFPB Director Richard Cordray urging that the CFPB take action to address online, offshore, and insured depository payday lending activities and products. The letter specifically pushes the CFPB to adopt rules and partner with state attorneys general to address (i) Internet-based lead generators that collect data on potential customers for payday lenders, (ii) offshore Internet lenders that avoid state laws by relying on loopholes in the rules covering debit transactions and remotely-created checks, and (iii) insured depository institutions that offer payday loan or similar products. In the same announcement, Senator Merkley revealed plans to introduce legislation that will, broadly, (i) require greater disclosure for online lending websites, (ii) address the abusive practice of providing false or misleading data to payday lenders and debt collectors to defraud consumers in paying debts they do not owe, (iii) attempt to limit the activities of offshore payday lenders, and (iv) address bank and insured depository institution payday loan products.

CFPB Payday Lending

Ninth Circuit Holds Director Personally Liable for Illegal Debt Collection

On March 8, the U.S. Court of Appeals for the Ninth Circuit held that International Collection Corporation (ICC) and its director were liable for violating the Fair Debt Collection Practices Act (FDCPA) by falsely claiming in communications to debtors that ICC was entitled to interest and legal fees. Cruz v. International Collection Corp., No. 09-17449, 2012 WL 742337 (9th Cir. Mar. 8, 2012). In 2006, Cruz wrote two checks to Harrah’s Casino in Reno, Nevada. The checks bounced. Over the course of the next year, ICC sent Cruz eight collection letters, some of which falsely claimed that ICC was entitled to treble damages, interest, and legal fees. The director and sole owner of ICC signed and sent at least one such collection letter. The FDCPA bars the use of any false, deceptive, or misleading representation in connection with the collection of any debt. 15 U.S.C. § 1692e. Cruz filed suit and the district court granted summary judgment for the plaintiff. The Ninth Circuit affirmed the decision against ICC and affirmed that Hendrickson was personally liable. Because the director was personally involved in at least one illegal collection attempt, the court did not need to reach the question of whether an officer who qualifies as a debt collector may be held personally liable based solely on the action of serving in his role as an officer of the company.

FDCPA

CFPB Director Addresses State Attorneys General, Spotlight on Payday Lenders, Debt Collectors, and Servicing Rules

The National Association of Attorneys General (NAAG) met this week in Washington, DC. Among the topics covered at the annual meeting was the ongoing and future coordination between federal and state law enforcement with regard to financial services. CFPB Director Cordray, a former state attorney general, noted that NAAG and the CFPB already have several working groups organized to address payday loans, foreclosure scams, auto loans, and debt collection. These efforts will be supported through a formal Memorandum of Understanding that is expected to be finalized soon. In his remarks and in follow up questioning, Director Cordray specifically addressed enforcement and supervision with regard to payday lenders and debt collectors. It was reported that Director Cordray indicated that the CFPB and the FTC are “zoning in” on issues related to payday lenders associated with Native American tribes. Regarding debt collectors, the Director stated that aggressive enforcement by the FTC and states is not enough, and that the CPFB would like federal and state regulators and enforcement agencies to develop a national strategic plan that leverages the CFPB’s supervision and enforcement capabilities. Finally, on planned rulemaking by the CFPB, the Director noted ongoing efforts to develop rules governing mortgage servicing, including force-placed insurance products and hybrid ARMs.

CFPB Payday Lending FDCPA Mortgage Servicing State Attorney General

CFPB Proposes Rule to Define "Larger Participants" in the Consumer Debt Collection And Consumer Reporting Markets

On February 16, the CFPB released a proposed rule to define “larger participants” in the markets for consumer debt collection and consumer reporting, thereby beginning the process by which the CFPB will determine which such entities are subject to its supervision. In short, the proposal uses annual receipts as the metric for determining larger participants. Under the Dodd-Frank Act, the CFPB has authority to supervise, regardless of size, nonbanks that provide to consumers (i) origination, brokerage, or servicing of residential mortgage loans secured by real estate, and related mortgage loan modification or foreclosure relief services; (ii) private education loans; and (iii) payday loans. The CFPB also has the power to supervise “larger participants” in any other market for consumer financial products or services, and the Act grants the CFPB authority to define “larger participants.” In this first effort to define larger participants in specific markets, the CFPB proposes to supervise debt collectors with more than $10 million in annual receipts from debt collection activities, which would cover approximately 175 debt collection firms that collectively account for 63 percent of annual receipts from the debt collection market. Consumer reporting agencies with more than $7 million in annual receipts from consumer reporting activities also would be covered, capturing approximately seven percent of consumer reporting agencies, or about 30 firms, which the CFPB estimates account for approximately 94 percent of the annual receipts from consumer reporting. Stakeholders and the public can submit comments on the proposal through April 17, 2012. The CFPB plans to issue larger participant proposed rules for other markets. Final rules for all markets must be published by July 21, 2012.

CFPB Dodd-Frank Nonbank Supervision

Special Alert: Report on NMLS Annual User Conference and Training

The Nationwide Mortgage Licensing System and Registry (NMLS) held its fourth annual NMLS User Conference and Training (the Conference) in Scottsdale, Arizona from February 6-9, 2012. The Conference brought together state and federal mortgage regulators, industry professionals, compliance companies, top law firms, and education providers to learn about the latest developments in mortgage supervision and to discuss pressing issues confronting the industry. This special report includes a summary of key topics addressed at the meeting as well as announcements regarding important state licensing initiatives, including:  (i) enhancements to the NMLS system to expand its use for licensing of non-mortgage financial services companies, (ii) issuance of SAFE Act examination guidelines, and (iii) the announcement of efforts to develop a uniform mortgage loan originator state test.

The first day of the Conference included the bi-annual NMLS Ombudsman Meeting, which provided an opportunity for NMLS users to raise issues concerning the NMLS, state and/or federal regulation. NMLS Ombudsman Deborah Bortner, Director of the Non-Depository Division of the Washington Department of Financial Institutions, presided over the meeting, in which specific questions submitted by industry representatives were addressed. Several of the submitted questions focused on "leveling the playing field" between depositories and non-depositories by suggesting various means to allow a more efficient flow of mortgage loan originators (MLOs) from a federally-registered MLO status to a state-licensed MLO status. Suggestions included "transitional licensing", which would allow a federally registered MLO that moves to a state-licensed entity to continue operating for a period of 120 days, during which the individual would complete education, testing and other requirements in order to secure licenses within the transitional approval. Another suggestion was to allow federally registered MLOs to complete state education, examination, and other approval requirements prior to moving from a federal registrant to a state licensee. During a later panel, the Consumer Financial Protection Bureau (CFPB) indicated that there are no immediate plans to amend the requirements applicable to federal registrants.

Full details regarding the specific issues submitted for comment, as well as accompanying exhibits, are available on the NMLS website.  A recording of the Ombudsman Meeting should be posted to the NMLS Resource Center in the near future.

The remaining days of the Conference covered various federal and state regulatory rule implementation, updates for industry, and a look ahead at new initiatives and changes to the NMLS. Specifically, various sessions covered the following issues:

• The CFPB’s supervision of the mortgage industry and the direction that the CFPB is taking with respect to depository and non-depository financial services, including a discussion with CFPB staff regarding issues of interpretation and implementation of state licensing, NMLS and the rules implementing the SAFE Act. Of particular interest, the CFPB indicated that it has started planning its first set of exams of non-depository financial institutions and that the CFPB will select institutions for examination based on size, volume, type of product or service offered, extent of state oversight, patterns of complaints, and other factors.
• Industry views on the regulation of and the future of the mortgage industry.
• Updates regarding the Mortgage Call Report, including a review of preliminary data, how it is used by regulators, and a review of additional changes and updates to assist with the compliance process.
• Review of the NMLS federal registration process and a discussion on how to improve the process.
• NMLS testing and education discussion, with a focus on understanding the desire from industry for increasing the available continuing education topics in order to provide a better learning experience for MLOs.
• NMLS federal examination and third party compliance management, including a discussion of best practices that institutions can consider to efficiently and effectively implement policies and procedures to ensure third parties are properly licensed and/or registered.
• Credit and criminal background checks for MLOs, control persons, and branch managers, which included discussions of expanding the criminal background check process from MLOs to also include branch managers and control persons.
• Potential modifications to the NMLS to accommodate state pre-notification filings for changes in control, changes in branch manager, or other changes in corporate structure or operations that require prior notice.
• Federal and state rules implementation, including ability to repay, loan officer compensation and TILA/RESPA disclosure conflicts.
• Discussion of important FHA rule changes for 2011 and upcoming changes in 2012.
• Surety bonds necessary to comply with state and federal law, including underwriting considerations, risk mitigation, and claim resolution.

In addition to the above general sessions, the Conference covered several major changes and new initiatives announced by the Conference of State Bank Supervisors (CSBS), including:

• System Enhancements and Expansion of NMLS to Cover Additional Financial Services Companies. The CSBS announced plansto expand the use of the NMLS to include nonbank, non-mortgage financial service providers, including consumer lenders, money services businesses, and debt collectors. Following this expansion, these other nonbank firms will be obligated to alter their compliance programs in order to apply for, amend, and renew state licenses using the NMLS. Entities that previously obtained and maintained relevant licenses via hard-copy applications and filings will be required to transition onto the NMLS, a process which could prove difficult as licensee's struggle to learn the new system and which may allow the state agency an opportunity to vet anew its licensees. While the electronic application and related processes will be centralized and uniform, entities that use the NMLS to obtain and maintain their licenses still will be subject to various unique state-specific requirements, which must be dealt with outside of the NMLS. For many participants in the mortgage industry, the mandated use of the NMLS has brought with it heightened compliance costs and increased reporting requirements, particularly as states increased disclosure and other application requirements to become more consistent with other states.  Non-mortgage state licensed financial institutions should be mindful of this experience and be prepared to review their licensing compliance procedures and resources following transition to the NMLS.  At a minimum, licensees should carefully monitor developments regarding licensing requirements during and after the transition to the NMLS.Through expansion of the system state bank regulators expect to see improved efficiency, and regulated entities can expect enhanced supervision and increased public access to license, registration, and supervisory information. The expansion is scheduled to begin in April when at least 12 states will begin transitioning their exiting licensing and registration systems to the NMLS.Further, the April expansion and update will include other changes and enhancements in an effort to improve the system overall:

• New Workflow – the changes and enhancements to the system require a new "license management workflow" (i.e., online navigation and information contained in the uniform plans) to support the new Business Activities section. The new workflow will (1) introduce a new navigational landing page in the Company (MU1), (2) combine the selection of licenses and entry of transition numbers into one step, and (3) introduce new navigation items onto the License/Registrations page.
• Amended Forms – the uniform mortgage forms (i.e., MU1 and MU3) will be amended to "Company Filing" and "Branch Filing", respectively, in anticipation of the expansion of the system to cover non-mortgage related industries.
• Business Activities – expands this section of the Form MU1 to allow users to identify a broader range of business activities conducted by the user (e.g., loan modifications, seller of money orders) based on definitions developed by the states.
• Approvals and Designations – introduces new approval and designation types, and allows users to add approval or identification numbers.
• Disclosure Explanation – in addition to updated company, branch and individual disclosure questions, a new disclosure explanation feature will allow users to add explanations to each disclosure question that has a “yes” answer in conjunction with submitting a filing.
• Document Upload – users will be able to upload specific materials into the NMLS to be shared by state regulators, thereby eliminating the need to send certain materials via hard copy outside the system. The type of materials that may be uploaded may include business plans, certificates of good standing, fidelity bonds, errors and omissions insurance, and other materials generally provided in the application and renewal process.
• Criminal Background Check for a Control/Qualifying Individual – all state licensed individuals will be required to complete a criminal background check via the NMLS.

Copies of the updated forms and "Business Activities Description" are available on the NMLS under News & Events.

Upon implementation of the new forms in April, existing NMLS users should be aware that in order to submit any new applications, address updates, addition of officers, or other general maintenance items, the company will be required to complete all new Company Filing fields, and the company's control persons and qualifying individuals must complete additional questions and information requests.

• SAFE Act Examination Guidelines. The Multi-State Mortgage Committee (MMC), a ten-state representative body created by CSBS and AARMR, issued SAFE Act Examination Guidelines (SEGs) for use by state non-depository mortgage regulators.  The SEGs are not required guidelines for state agencies, but utilization of SEGs is intended to allow state agencies to determine compliance with the SAFE Act and provides consistent and uniform guidelines for use by institution in-house compliance and audit departments conducting SAFE Act and state compliance reviews. The SEGs are presented in a question and answer format and are “modular,” such that state mortgage regulators may easily use part or all of the SEGs as they see fit.

• Uniform MLO State Test. The CSBS announced that efforts are underway to develop content for a uniform MLO state test. Currently, an MLO is required to take the state component of the SAFE Act mortgage loan originator test for each state in which he or she intends to be licensed. With the introduction of a uniform MLO state test, an MLO will meet the testing requirement for multiple states by passing a single test that includes content representative of all of the states.An ad hoc committee composed of state regulators has been charged with researching the feasibility of developing a uniform MLO state test.  In coordination with industry subject matter experts and test consultants, the committee has completed its initial feasibility studies and test development is now underway. Later this year, the committee plans to present a uniform test proposal to state regulators.

A message that pervaded the Conference was that with the completion of several multi-year NMLS initiatives responding to the requirements of the SAFE Act (e.g., the introduction of the NMLS Mortgage Call Report), NMLS is turning its attention to implementing changes to and expanding the NMLS.  While the changes are ultimately intended to streamline the NMLS process, current NMLS users should prepare for additional oversight and regulation, and licensees transitioning onto the system should prepare for heightened compliance costs and increased reporting requirements.

For more information about NMLS, visit the NMLS Resource Center, About NMLS.

CFPB Mortgage Licensing Nonbank Supervision Mortgage Origination

Nineteen States Settle With Debt Collector Over Collection Practices

On February 6, nineteen state attorneys general announced a multi-state settlement with NCO Financial Systems, a debt collection company, to resolve allegations of misleading and deceptive debt collection practices. Under the agreement, the company must set aside $950,000 ($50,000 for each state) for consumer restitution, and will pay $575,000 for state consumer protection enforcement efforts. Restitution will go to consumers who paid the company for debts the consumers did not owe, who overpaid interest, or who overpaid a debt beyond what the company had agreed to settle an account. The company also agreed to (i) comply with the Fair Debt Collection Practices Act, the federal Fair Credit Reporting Act, and all applicable state laws, (ii) notify credit reporting agencies within 30 days of consumer disputes and results of investigations into disputes, (iii) provide notice to consumers about their debt collection rights under federal and state law, and (iv) monitor compliance, create written policies and procedures for handling consumer complaints, and submit periodic compliance reports.

FDCPA FCRA

Oklahoma District Court Dismisses Most Claims in Putative Wrongful Foreclosure Class Action

On January 6, the U.S. District Court for the Western District of Oklahoma dismissed the majority of claims brought by two borrowers seeking to represent a class of borrowers against Bank of America Corporation, Bank of America N.A., and BAC Home Loans Servicing, LP (collectively BAC) for alleged wrongful foreclosure practices. Risener v. Bank of Am. Corp., No. 10-1110 (W.D. Okla. Jan 6, 2012). In this case, the borrowers claim that after their original servicer ceased operations, their loan servicing was assigned to BAC and their loan was inaccurately recorded as being in default. According to the borrowers, multiple attempts to prove that the borrowers were not in default were ignored by the defendants. Further, according to the borrowers, BAC Home Loans Servicing, LP, continued to send default notices and threatened to foreclose, refused to verify the borrowers’ default status, and reported false information about borrowers to credit reporting agencies.

As such, the borrowers allege that defendants (i) violated the Fair Debt Collections Practices Act (FDCPA) by using false, deceptive, or misleading representations in the collection of debts and by failing to provide certain required notices; and (ii) violated the Fair Credit Reporting Act (FCRA) by providing false information to credit reporting agencies and by failing to investigate the disputed default loan status. Agreeing with a recent Georgia decision involving a similar fact pattern, the court held that because the borrowers allege their loan was not in default, BAC could not have been “debt collectors” subject to the FDCPA, because the FDCPA requires a loan to be “in default”, not “allegedly in default.” Further, the borrowers do not allege that Bank of America Corporation or Bank of America, N.A. ever attempted to collect a debt and, therefore, regardless of their status as a debt collector, cannot be found in violation of the FDCPA. With regard to the borrowers’ FCRA claims, the court held that the FCRA does not include a cause of action for the act of providing false information but that borrowers’ claims that BAC Home Loans Servicing failed to investigate were sufficiently supported by the allegations in the complaint and therefore could proceed.

Foreclosure FDCPA FCRA

Ninth Circuit Upholds FDCPA Ruling Against Debt Collection Law Firm

On March 4, the U.S. Court of Appeals for the Ninth Circuit affirmed a debtor’s judgment against a debt collector under the federal Fair Debt Collection Practices Act (FDCPA), the Montana Unfair Trade Practices and Consumer Protection Act and state tort claims of malicious prosecution and abuse of process. McCollough v. Johnson, Rodenburg & Lauinger, No. 09-35767 (9th Cir. Mar. 4, 2011). The plaintiff debtor’s delinquent credit card account was sold by the credit issuer to a debt buyer. The debt buyer brought a state court action to recover on the debt but dismissed the action after the debtor asserted in response that the statute of limitations had run. The debt buyer then retained a debt collection law firm, Johnson, Rodenburg & Lauinger (JRL), to pursue the action, which it did until it was instructed to dismiss the suit several months later based on it being time barred. The debtor brought an action against JRL in federal court. The district court granted partial summary judgment on the FDCPA claims and the debtor won the other claims at trial. In affirming the ruling of the district court, the Ninth Circuit found that JRL’s defense of bona fide error as to the FDCPA action failed as a matter of law. The court held that JRL erred by relying without verification on its debt buyer client’s representation that the statute of limitations was extended and by overlooking contrary information in its electronic file. "JRL thus presented no evidence of procedures designed to avoid the specific errors that led to its filing and maintenance of a timebarred collection suit" against the debtor, the court concluded. The court also upheld summary judgment on the debtor’s claim that JRL violated the FDCPA by pursuing unauthorized attorneys’ fees. The FDCPA prohibits "[t]he collection of any amount . . . unless such amount is expressly authorized by the agreement creating the debt or permitted by law." JRL’s presentment of generic evidence that all credit cardholder agreements provide provisions for attorneys’ fees was found to be insufficient to defeat summary judgment. The court also concluded that: false requests for admission of JRL in the underlying action violated the FDCPA; the district court did not abuse its discretion in allowed testimony from other consumers relating to JRL; and, that the district court properly allowed the jury’s $250,000 award for actual damages due to the emotional distress of the plaintiff, who years earlier had suffered a head injury and suffered from mixed personality disorder and multiple other afflictions, including post-traumatic stress disorder.

Eleventh Circuit Holds FDCPA Private Right of Action May Be Premised on Violation of Corresponding State Law That Provides No Private Right of Action

On March 30, the U.S. Court of Appeals for the Eleventh Circuit held that a federal cause of action under the Fair Debt Collection Practices Act (FDCPA) is cognizable when premised upon a failure to comply with a state consumer protection statute, even where the state statute is analogous to the FDCPA and itself provides no private right of action. LeBlanc v. Unifund CCR Partners, No. 08-16031, 2010 WL 1200691 (11th Cir. Mar. 30, 2010). In LeBlanc, the plaintiff debtor ceased making payments on a credit card. The defendant debt collector purchased the charged-off account and endeavored to collect the debt by, among other things, sending a letter to the debtor advising that it "may refer this matter to an attorney in your area for legal consideration." The debt collector subsequently filed suit in state court to collect the debt. The debtor filed suit in federal court, alleging violations of the FDCPA and the Florida Consumer Collection Practices Act (CCPA). The district court granted partial summary judgment to the debtor, finding that the debt collector violated the FDCPA by failing to register as an "out-of-state consumer collection agency" with the State of Florida, as required by the CCPA, and therefore could not legally sue to collect the debt. Because the district court also viewed the letter as a threat to take legal action, it held that the debt collector violated the FDCPA’s prohibition on any "threat to take action that could not be legally taken" and for using "unfair or unconscionable means to collect a debt." On appeal, the debt collector argued that, because the CCPA provision requiring registration does not itself provide a private right of action, premising a federal cause of action upon the same conduct and legal theory under the FDCPA would undermine or circumvent the state’s consumer protection scheme. The Eleventh Circuit, however, found that (i) the CCPA’s goal of providing consumers with the most protection possible must favor enforcement in the event of any inconsistency between federal and state statutes; (ii) in deeming the CCPA’s remedies cumulative, the legislature contemplated dual enforcement; and (iii) the fact that a debt collector’s failure to register is a misdemeanor criminal act in Florida demonstrates the seriousness of CCPA violations. Therefore, the Eleventh Circuit held that a violation of the CCPA for failure to register may support a federal cause of action under the FDCPA for threatening to take an action not legally available. As to the merits of the claims, the court found that (i) whether the letter constituted a threat for purposes of Section 1692e(5) of the FDCPA and (ii) whether the letter constituted an unfair or unconscionable means to attempt to collect a debt presented genuine issues of material fact for resolution by a jury, and precluded summary judgment.