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Fifth Circuit rules that loan-modification discussions resulting in foreclosure do not violate TDCA
On January 22, the U.S. Court of Appeals for the Fifth Circuit affirmed a lower court’s decision that a loan-modification discussion between two borrowers and a mortgage servicer did not constitute a debt collection activity under the Texas Debt Collection Act (TDCA). After two borrowers defaulted on their home equity loan, they were encouraged by their mortgage servicer to apply for a modification under the Home Affordable Modification Program (HAMP). When the borrowers learned that they were, in fact, ineligible for a HAMP modification, due to state law restrictions, the borrowers filed suit against the creditor and the mortgage servicer (the “creditors”). Specifically, the borrowers alleged that the creditors violated the TDCA’s prohibition against using false representations or deceptive means to collect a debt by suggesting that the borrowers apply for a HAMP modification for which they did not qualify. The three-judge panel rejected this argument for two reasons. First, the court found that the borrower and creditors conversation about a modification did not “concern the collection of a debt” and thus the conduct was not subject to the TDCA. Second, even if the conduct were covered, the court found that the creditor had not affirmatively represented that the borrowers would qualify for a HAMP modification and, thus, under the TDCA’s prohibition against using false representations and deceptive means to collect a debt, no liability could ensue.
Fifth Circuit Claims Loan Modification Communications Are Not Debt Collection Activities Under TDCA
On December 11, the U.S. Court of Appeals for the Fifth Circuit ruled that a mortgage servicer’s communications about a potential loan modification do not constitute “debt collection activity” under the Texas Debt Collection Act (TDCA). The servicer had initially told borrowers that they could apply for a loan modification but later informed them that they were not eligible. The borrowers unsuccessfully appealed the determination with the servicer, yet prior to a final determination on the appeal, the servicer sent a statement reflecting a new monthly payment in the amount that the borrowers had been requesting. The borrowers made one payment in that amount, which the servicer accepted, but weeks later the servicer sent a letter stating that the mortgage was still in default. In affirming the district court’s judgment in favor of the mortgage servicer, the three-judge panel determined that while “modification discussions may constitute debt collection activities under the TDCA when those discussions are used as a ruse to collect debt,” the borrowers failed to make such a showing, and instead the servicer’s misrepresentations were “merely poor customer service.”
Fifth Circuit Affirms Debt Collector Violation of FDCPA
On July 6, the U.S. Court of Appeals for the Fifth Circuit held that a debt collector violated the Fair Debt Collection Practices Act (FDCPA) when it failed to notify credit reporting agencies that a consumer had disputed a debt. The Fifth Circuit further determined that this failure was sufficient to comprise a concrete injury conferring standing for the consumer to sue.
In its opinion, the appellate court focused on FDCPA § 807(8) and § 809(b), since the debt collector argued that the requirements in § 809 apply to § 807(8), relieving it of its notification duty under § 807(8). Although the appellate court found that the consumer had not disputed his debt under § 809, it agreed with the district court that this failure did not obviate the debt collector’s responsibility under § 807(8). The appellate court found that the debt collector was in violation of the FDCPA for passing on “credit information which is known or which should be known to be false, including the failure” to notify credit agencies of consumer’s disputed debt. Additionally, the appellate court determined that the debt collector’s violation of § 807(8) “exposed [the consumer] to a real risk of financial harm caused by an inaccurate credit rating.”