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9th Circuit holds that judicial foreclosure proceedings to collect unpaid HOA fees is debt collection under FDCPA
On June 25, the U.S. Court of Appeals for the 9th Circuit held that judicial foreclosure proceedings to collect delinquent assessments and other charges that were owed to a homeowners association (HOA) represented by a law firm that was also a defendant in the case constitute “debt collection” under the Fair Debt Collection Practices Act (FDCPA). The decision results from unpaid assessments owed to the HOA that had previously been settled in two prior suits. However, the homeowner (plaintiff-appellant) defaulted on both settlement agreements, and foreclosure proceedings commenced due to an acknowledgment contained within the second agreement, which recognized the HOA’s right to collect the debt by foreclosing on and selling her property. According to the order, the 9th Circuit first drew a distinction between judicial foreclosures and nonjudicial foreclosures. Nonjudicial foreclosures, the 9th Circuit opined, are not debt collections under the FDCPA because, under California law, they present no possibility of a deficiency judgment against the homeowner and recover nothing from the homeowner. However, the Court held that in this case, the judicial foreclosure created the possibility for a deficiency judgment against the homeowner and subsequent collection of money. Furthermore, since the law firm regularly collected debts owed to others, it was a debt collector, and the lower court’s contrary decision “cannot be reconciled with the language of the FDCPA.” The 9th Circuit reversed the lower court’s ruling that the defendants were not engaged in “debt collection” as defined by the FDCPA.
However, because the lower court granted summary judgment to the defendants, it did not assess whether the plaintiff-appellant had suffered any damages from her claim that the defendants “misrepresented the amount of her debt and sought attorneys’ fees to which they were not entitled” during judicial proceedings. The 9th Circuit held that the law firm’s application for a writ of special execution included “accruing attorney fees,” implying that the fees had been approved by a court, as required by state law, when they had not. The 9th Circuit noted that the state trial court’s subsequent approval of the fee request did not mean the representation was accurate when it was made. The 9th Circuit remanded to allow the lower court to determine what damages, if any, were due the homeowner due to this violation.
In a separate memorandum disposition, the 9th Circuit, however, affirmed in part the lower court’s order granting the defendants’ motion for summary judgment concerning the plaintiff-appellant’s time-barred claims, holding that “even the ‘least sophisticated debtor’ would not likely be misled by the communication—and lack of communication—at issue here, as Plaintiff cannot have reasonably believed that she had paid off the debt in question.”
FTC and New York Attorney General announce action against phantom debt operation
On June 27, the FTC and the New York Attorney General’s Office announced charges against two New York-based phantom debt operations and their principals. The complaint alleges they ran a deceptive and abusive debt collection scheme involving the marketing and selling of fictitious loan debt portfolios and collecting on debts consumers did not owe. The charges brought against the operations allege violations of the FTC Act, the Fair Debt Collection Practices Act, and New York state law. According to the complaint, the debt broker knowingly purchased fabricated debt from a phantom debt collection operation previously charged by the FTC and the Illinois Attorney General in a separate action for selling fabricated debt. (As previously covered by InfoBytes, the Illinois-based operation was banned from the debt collection business and prohibited from selling debt portfolios.) The debt broker then engaged a debt collection agency and its owner to collect on the fabricated debt using illegal collection tactics, while continuing to purchase debts and place them for collection despite having knowledge that consumers disputed the debts. The complaint seeks, among other things, injunctive relief, restitution, and disgorgement.
District Court holds that a debt buyer qualifies as a debt collector under the FDCPA
On May 25, the U.S. District Court for the Eastern District of Pennsylvania held that a debt buyer of time-barred debt qualified as a “debt collector” under the Federal Debt Collection Practices Act (FDCPA). The consumer (plaintiff) sued a debt collector and a debt buyer after receiving collection letters from the collector requesting she contact it to discuss settlement. The plaintiff alleged both companies violated the FDCPA by implying the debts were legally enforceable when, in fact, the statute of limitations had run. In rejecting the defendants’ motion to dismiss, the court found that the debt buyer’s “principal purpose of business is debt collection, either directly or through another collector” and therefore it is a debt collector under the FDCPA. The court also rejected the defendants’ arguments that the consumer did not adequately plead a violation of the FDCPA, holding that the collection letter—even though it did not threaten litigation or include a payoff amount—could mislead “the least sophisticated debtor” into believing she had a legal obligation to pay a time-barred debt because it called on plaintiff to contact it to discuss “settlement options” and specifically noted that the collector was not obligated to accept any payment proposal. The court also found that the letter may leave the least sophisticated debtor “uncertain as to her dispute rights under the [FDCPA]” and should have contained a “reconciling statement.”
Maryland expands scope of unfair and deceptive practices under the Maryland Consumer Protection Act, increases maximum civil penalties
On May 15, the Maryland governor signed HB1634, the Financial Consumer Protection Act of 2018, which expands the definition of “unfair and deceptive trade practices” under the Maryland Consumer Protection Act (MPCA) to include “abusive” practices, and violations of the federal Military Lending Act (MLA) and Servicemembers Civil Relief Act (SCRA). The law also, among other things:
- Civil Penalties. Increases the maximum civil penalties for certain consumer financial violations to $10,000 for the initial violation and $25,000 for subsequent violations
- Debt Collection. Prohibits a person from engaging in unlicensed debt collection activity in violation of the Maryland Collection Agency Licensing Act or engaging in certain conduct in violation of the federal FDCPA.
- Enforcement Funds. Requires the governor to appropriate at least $700,000 for the Office of the Attorney General (OAG) and at least $300,000 to the Office of the Commissioner of Financial Regulation (OCFR) for certain enforcement activities.
- Student Loan Ombudsman. Creates a Student Loan Ombudsman position within the OCFR and establishes specific duties for the role, including receiving, reviewing, and attempting to resolve complaints from student loan borrowers.
- Required Studies. Requires the OCFR to conduct a study on Fintech regulation, including whether the commissioner has the statutory authority to regulate such firms. The law also requires the Maryland Financial Consumer Protection Commission (MFCPC) to conduct multiple studies, including studies on (i) cryptocurrencies and initial coin offerings and (ii) the CFPB’s arbitration rule (repealed by a Congressional Review Act measure in November 2017).
3rd Circuit holds FDCPA statute of limitations begins to run on occurrence, not discovery, of violations, splitting from 4th and 9th Circuits
On May 15, the U.S. Court of Appeals for the 3rd Circuit issued an en banc ruling that the statute of limitations on the ability to sue for a violation of the Fair Debt Collection Practices Act (FDCPA) is one year from the date the Act is violated. The ruling is a departure from contrary decisions issued by the 4th and 9th Circuits, which both held that the statute of limitations begins to run when a violation is discovered, not when it occurs.
Citing the FDCPA’s provision that claims must be filed “within one year from the date on which a violation occurs,” the court found that intent of the FDCPA is that the statute of limitations should begin to run at the moment the alleged wrongdoing happens, and not when the cause of action is discovered. The Court found that the 4th and 9th Circuits’ decisions to the contrary failed to analyze the “violation occurs” language of the statute.
However, the court noted that its holding does not serve to undermine the doctrine of equitable tolling, and “should not be read to foreclose the possibility that equitable tolling might apply to FDCPA violations that involve fraudulent, misleading, or self-concealing conduct.” This question was not addressed, the court noted, because the plaintiff-appellant failed to preserve the issue on appeal.
7th Circuit affirms summary judgment for consumers in FDCPA suit
On May 2, the U.S. Court of Appeals for the 7th Circuit affirmed four district court decisions granting summary judgment in favor of consumers who alleged a debt collector violated the Fair Debt Collection Practices Act (FDCPA) by communicating debts to credit reporting agencies without indicating the debts were disputed. According to the opinion, the debt collector sent the four consumers a debt validation notice regarding an alleged credit card debt. More than 30 days later, a local legal aid organization sent the debt collector’s general counsel a notice of representation for each of the four consumers, noting, “the amount reported is not accurate.” After the attorney letters were sent, the debt collector reported the debts to the credit reporting agencies. The consumers each filed a separate action in district court alleging a violation of the FDCPA, and each district court granted the consumer summary judgment, finding the debt collector did not handle the letters properly. In the consolidated appeal, the 7th Circuit agreed with the district courts, holding that the actions of the debt collector were “a clear violation of the statute” as each attorney letter stated the amount was inaccurate and the debt collector still reported the debts without noting they were disputed. While the panel noted that there is no clear definition of “dispute” under the FDCPA, the court concluded, “there is simply no other way to interpret [the] language” of the attorney letter, rejecting the debt collector’s “bona fide error defense.”
8th Circuit affirms dismissal of FDCPA claims, rules false or misleading statements must be material to be actionable
On April 19, the U.S. Court of Appeals for the 8th Circuit affirmed a district court’s decision to grant a debt collector’s motion for judgment on the pleadings, concluding that false or misleading statements under the Fair Debt Collection Practices Act (FDCPA) must be material to be actionable. According to the opinion, the Conciliation Court for the 4th Judicial District of Minnesota previously issued a judgment finding that the debt collector failed to demonstrate “an entitlement to relief” when the debt collector sought payment (including statutory interest) for unpaid medical services. The plaintiff-appellant subsequently filed suit against the debt collector alleging that the debt collector’s conduct before the conciliation court violated the FDCPA. The district court issued a decision—which the 8th Circuit affirmed—holding that the debt collector’s “inadequate documentation of the assignment did not constitute a materially false representation” and, although the debt collector was ultimately unable to collect on the debt, loss of a collection action, standing alone, did not establish a violation of the FDCPA under the materiality standard. Additionally, the 8th Circuit held that the debt collector did not engage in unfair practices under the FDCPA when the debt collector attempted to collect interest on the debt under a Minnesota statute simply because the debtor may have had a legal defense to application of the statute.
Twenty state Attorneys General oppose bill that would remove attorneys engaged in debt collection litigation from FDCPA purview
On April 19, a coalition of twenty state Attorneys General issued a letter to leaders of Congress expressing opposition to the Practice of Law Technical Clarification Act, HR 5082, which would amend the FDCPA to exclude law firms and attorneys engaged in debt collection-related litigation activities from the scope of the FDCPA. The House Financial Services Committee passed HR 5082 on March 21 with a vote of 35-25. In the letter, the Attorneys General state, “debt collection lawsuits comprise the majority of many state-court dockets” and note numerous actions brought by the CFPB and state Attorneys General against debt collection law firms and attorneys for illegal collection practices. The letter argues that debt collection attorneys should be held accountable when using litigation for improper purposes and that HR 5082 would preclude Attorneys General from using the FDCPA to pursue improper behavior. Additionally, the letter notes, “the FDCPA is the only consumer protection tool available to State Attorneys General in a significant number of jurisdictions where state consumer protection law does not govern the conduct of attorneys.”
FTC and Florida Attorney General settle with debt relief scammers
On April 12, the FTC and the Florida Attorney General announced an $85 million settlement with three individuals who allegedly sold fake debt relief services. As previously covered by InfoBytes, in May 2017, the FTC and the Florida Attorney General filed a complaint against the individuals for allegedly violating the FTC Act, the FTC’s Telemarketing Sales Rule, and the Florida Deceptive and Unfair Trade Practices Act. According to the complaint, consumers, after collectively paying hundreds or thousands of dollars a month for promised debt-consolidation services marketed by the individuals, discovered their debts were unpaid, their accounts had defaulted, and their credit scores damaged. Under the proposed orders (here and here), all three marketers are restrained and enjoined from “advertising, marketing, promoting, offering for sale, selling” credit repair products and services, debt relief products and services, and financial products and services. The $85 million judgment is held jointly and severally against each of the individuals with a suspended judgment for two if all material assets are surrendered. The judgment for the third individual, considered the ringleader of the operation, is not suspended and the individual is still required to surrender all material assets.
District court rejects motions for summary judgement on FDCPA claims filed by CFPB, debt collection law firm
On April 9, the U.S. District Court for the Northern District of Ohio rejected motions for partial summary judgment and summary judgment filed respectively by the CFPB and a law firm accused of making false representations regarding attorney involvement in debt collection calls in violation of the Fair Debt Collection Practices Act (FDCPA) and Dodd-Frank. As previously discussed in InfoBytes, the CFPB alleged in its complaint that the law firm sent demand letters and made collection calls to consumers that falsely implied that the consumer’s account files had been meaningfully reviewed by an attorney, when, in most cases, no attorney had reviewed the account file. Among other things, the law firm countered that, because its communications truthfully identified it as a law firm and it was acting as a debt collector, these communications were not misleading to the “least sophisticated consumer”—a factor of measurement for analyzing FDCPA violations. The court ruled that “whether the communications at issue are misleading is a question of fact that must be determined by a jury.” The jury trial is set for May 1.