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Mortgage debt collection class survives dismissal motion
On February 8, a federal judge for the U.S. District Court of the Western District of Pennsylvania denied a debt collector’s motion to dismiss, concluding that the plaintiffs are not precluded from bringing the claims against the debt collector even though the plaintiffs previously settled similar claims with the lender and loan servicer for their maximum recovery amounts under the Fair Debt Collection Practices Act (FDCPA). According to the third amended complaint, a pair of named plaintiff homeowners, defaulted on their mortgages in 2010 and worked out a new payment plan with their lender; however, they continued to receive conflicting foreclosure communications from their lender, servicer, and an associated debt collector, which resulted in the payment of allegedly unauthorized fees and expenses. In 2011, the two homeowners filed class action claims against all three entities and in 2016, they settled one claim with the lender and three claims with the servicer.
In response to the third amended complaint, the debt collector filed a motion to dismiss the remaining class claim, which includes “all former or current homeowners” who received communications from the debt collector demanding foreclosure fees and costs that had not yet been incurred. The debt collector argued, among other things, in its dismissal motion that the plaintiffs are not entitled to any further damages for the alleged FDCPA violations because they previously exhausted the $1,000 maximum penalty per borrower permitted by the FDCPA by settling with the mortgage servicer. In denying the motion, the judge disagreed with the debt collector’s argument, noting that it cannot be assumed the settlement with the mortgage servicer was an admission of liability under the FDCPA; therefore, the judge reasoned, the court cannot credit the debt collector “with the full impact of the [servicer’s] settlement funds that maybe were (or maybe were not) allocated to that specific FDCPA claim.” The judge also noted that there is a “major split” on this issue among U.S. district courts.
District court grants motion to compel arbitration, cites failure to dispute scope of clause
On January 29, the U.S. District Court for the Western District of Pennsylvania granted a motion to compel arbitration, finding that an arbitration clause set forth under extension agreements with an automobile finance company to refinance and extend the plaintiff’s loan obligation is “valid and enforceable.” Additionally, the court ruled that alternative motions to dismiss filed by other defendants were moot, and then stayed and administratively closed the matter pending the resolution of the claims subject to arbitration. The plaintiff alleged violations of her Fourth and Fourteenth Amendment rights, the Fair Debt Collections Practices Act, and several other state and federal credit statutes, when defendants—including the automobile finance company—repossessed her vehicle despite having signed extension agreements. In response to the defendants’ assertion that her claims were subject to the arbitration clause, the plaintiff argued that the extension agreements were unenforceable due to the unavailability of the “designated arbitrators,” and that defendants were barred from trying to obtain “alternative relief” by relying on additional terms outlined in a second extension agreement that released defendants from liability. However, the court ruled that the plaintiff’s failure to dispute the scope of the arbitration clause meant that the defendants were “entitled to enforcement of the arbitration clause with respect to all claims and defenses asserted,” so long as the designated arbitrators are available.
Utah District Court says FDCPA does not bar state law claims
On January 23, the U.S. District Court for the District of Utah denied a debt collector’s motion to dismiss a plaintiff’s claim that the debt collector’s practices violated the Utah Consumer Sales Protection Act (UCSPA). After the plaintiff sued the debt collector for allegedly collecting amounts in excess of what was actually owed in violation of the FDCPA and the UCSPA, the debt collector moved to dismiss the claim under UCSPA because a more specific statute, the FDCPA, controls. In denying the motion, the court found that the plaintiff should not be denied remedies under UCSPA simply because a more specific federal law exists. The court noted that the UCSPA claim would only be barred if there were a more specific state statute that regulated debt collection and the debt collector did not identify one.
10th Circuit says FDCPA does not cover non-judicial foreclosures
On January 19, the U.S. Court of Appeals for the 10th Circuit affirmed a lower court decision that the Fair Debt Collection Practices Act (FDCPA) does not cover non-judicial foreclosures in Colorado. In affirming the District Court’s dismissal of the case, the 10th Circuit reasoned that non-judicial foreclosures in Colorado do not constitute an attempt to collect money from a debtor because the state only allows the trustee to obtain payment from the sale of the foreclosed property and a deficiency judgment must be sought through a separate action. According to the opinion, in 2014, a mortgage servicer hired a law firm to initiate a non-judicial foreclosure and the law firm sent the homeowner a letter indicating that it “may be considered to be a debt collector attempting to collect a debt.” The homeowner then filed a complaint in District Court against the firm and the mortgage servicer for FDCPA violations, which was subsequently dismissed. The 10th Circuit reasoned that the mortgage servicer was not considered a debt collector under the law because servicing initiated prior to the loan’s default and the law firm’s communications with the homeowner never attempted to induce payment. The opinion acknowledges that many courts are split on this topic and emphasizes that the holding does not apply to judicial foreclosures.
7th Circuit says debt collectors cannot simply copy and paste safe harbor language
On January 17, the U.S. Court of Appeals for the 7th Circuit reversed a decision by the U.S. District Court for the Eastern District of Wisconsin dismissing the plaintiffs’ claims that the defendant debt collection agency violated the Fair Debt Collection Practices Act (FDCPA) by falsely stating balances owed might increase “due to interest, late charges and other charges” in its dunning letters to the plaintiffs. In 2016, the defendant sent collection letters for overdue medical bills; according to the plaintiffs, the collection letters falsely suggested that the debt would continue to increase every day due to “late charges and other charges” that the defendant could not legally impose. In granting the motion to dismiss, the District Court had agreed with the defendant that the language used in their dunning letters was nearly identical to the safe harbor language upheld by the 7th Circuit in 2000, and that the letters were not “false, deceptive, or misleading.” By reversing the District Court’s decision, the 7th Circuit determined that the defendant’s use of the safe harbor language in their letters was inaccurate, because the defendant could not lawfully impose “late charges and other charges.” In doing so, the 7th Circuit rejected the defendant’s attempt to copy and paste the safe harbor language, and instead concluded that debt collectors are required to tailor boilerplate language to avoid ambiguity and ensure their statements are accurate under the circumstances.
Illinois Appellate Court rules generic card agreement cannot compel arbitration
On January 4, the Illinois Appellate Court (Fifth District) handed down an opinion affirming a circuit court’s decision to deny a debt collection company’s motion to dismiss and compel arbitration. In 2015, the company filed complaints against defendants-counterplaintiffs for failing to make payments on their accounts and entering into default. In class action counterclaims, the defendants-counterplaintiffs challenged the debt collection company’s alleged practice of suing to collect debt purchased from others without “sufficient proof of ownership of the debt,” and sought damages for purported violations of the Fair Debt Collection Practices Act, among others. The debt collection company argued that because the class action counterclaims fell within the scope of a binding card agreement—which included an arbitration clause and a class action waiver provision—the class claims should be barred and dismissed. The circuit court considered whether the agreements entered into between the company and the defendants-counterplaintiffs were subject to arbitration, and determined that the company failed to demonstrate that the card agreement containing the arbitration clause was received by, agreed to, or otherwise applied to the consumers within the agreements governing the accounts in question. The appellate court affirmed and concluded that, upon review, the company’s appeal failed to “demonstrate when or how the generic [c]ard [a]greement containing the arbitration provision pertained to [defendants-counterplaintiffs] or that it was communicated . . . prior to subsequent credit card use.”
Ninth Circuit Denies Arbitration, Lacks Jurisdiction to Review Anti-SLAPP Motion
On December 27, the U.S. Court of Appeals for the Ninth Circuit issued an opinion affirming the district court’s decision to deny the defendants’ request to compel arbitration against plaintiffs who elected to participate in the defendants’ administration of California’s “Bad Check Diversion Program” (BCD Program). The order is the result of two consolidated appeals from separate district court orders related to a putative class action lawsuit claiming that the defendants violated the federal Fair Debt Collection Practices Act (FDCPA) and California Unfair Competition Law in their administration of the BCD Program. The BCD Program, administered by private entities in agreement with a local district attorney, provides consumers accused of writing bad checks the opportunity for deferred prosecution. Under the BCD Program, the defendants sent notices on official district attorney letterhead offering the plaintiffs the chance to avoid criminal prosecution under California’s bad check statute if they participated in the BCD Program and paid specified fees. The notices also included an arbitration clause. In the class action lawsuit, plaintiffs alleged that defendants violated the law by misleading plaintiffs into thinking law enforcement sent the letters and by allegedly including false threats in the letters that implied that failure to pay would result in arrest or imprisonment.
In response to the lawsuit, defendants filed a motion under California’s Anti-SLAPP law, which protects defendants from strategic lawsuits against public participation (SLAPP), to strike the plaintiffs’ state law claims as well as a motion to compel arbitration pursuant to the arbitration clause in the notices. With respect to the defendant’s motion to compel arbitration, the panel opined that the BCD Program is not subject to Federal Arbitration Act (FAA) provisions because it is “an agreement between a criminal suspect and the local authorities about how to resolve a potential state-law criminal violation” rather than a “private or commercial contract.” In response to the defendants’ Anti-SLAPP motion, the appellate panel concluded that it “lacked jurisdiction to review the district court’s denial of defendants’ Anti-SLAPP motion because, under the terms of the state statute, such a denial in a case deemed [by the lower court] to be filed in the public interest is not immediately appealable.”
The panel remanded to the district court for further proceedings.
Second Circuit Ruling May Expose Debt Collection Law Firms to Increased FDCPA Claims
On November 14, the U.S. Court of Appeals for the Second Circuit reversed a Southern District of New York dismissal of a lawsuit against a debt collection law firm regarding actions taken during state court collection proceedings. Concluding that the plaintiff had stated a claim against the law firm under two sections of the Fair Debt Collection Practices Act (FDCPA), a three-judge panel vacated the dismissal and remanded for further proceedings consistent with its decision.
The appeal stems from the law firm’s actions in attempting to collect on a default judgment entered against the plaintiff. After receiving a restraining notice from the law firm, the plaintiff’s bank placed a restraint on his checking account and the law firm told plaintiff that, unless he made a payment, he would have to get a court order to lift the restraint. The plaintiff sought such an order on the grounds that all the money in his checking account was Social Security Retirement Income (SSRI) and, therefore, exempt from restraint. The plaintiff claimed that the law firm’s objection to his request contained false statements in violation of the FDCPA and New York law because the plaintiff had earlier provided the law firm with documents supporting his exemption claim.
In finding the complaint states a claim under FDCPA section 1692e, the Court rejected, among other arguments made by the law firm, the notion that FDCPA liability cannot be imposed based on conduct in litigation; the opinion contrasts bankruptcy court proceedings—where the Second Circuit has found the filing of false statements of claim does not violate the FDCPA—with those of state courts, “where . . . the consumer, often unfamiliar with the law governing garnishment of bank accounts, has the benefit of neither counsel nor a bankruptcy trustee.” The Court also held that “a debt collector engages in unfair or unconscionable litigation conduct in violation of [FDCPA] section 1692f when . . . it in bad faith unduly prolongs legal proceedings or requires a consumer to appear at an unnecessary hearing.”
FTC Files Complaint Against Debt Collection Business for Alleged Violations of FTC Act, FDCPA
On November 8, the FTC issued a press release announcing charges against a Georgia-based debt collection business for allegedly violating the FTC Act by making false, unsubstantiated, or misleading claims to trick consumers into paying debt they did not actually owe. In the complaint, the FTC alleged defendants threatened legal action, garnishment, and imprisonment if the purported debt was not paid, and in other instances, attempted to collect debts after consumers provided proof the debt was paid off. Additionally, the defendants allegedly violated the Fair Debt Collection Practice Act (FDCPA) by (i) making false, deceptive, or misleading representations, including withholding the true status of the debt, threatening legal action or imprisonment, and failing to disclose they were debt collectors; (ii) engaging in unlawful third-party communications without obtaining prior consumer consent; and (iii) failing to provide consumers written verification of their debt within the required time frame. According to the FTC, defendants have collected more than $3.4 million from consumers since January 2015. A federal judge in the U.S. District Court for the Northern District of Georgia has temporarily restrained and enjoined the defendants’ alleged illegal practices and frozen their assets.
District of Columbia Adopts Student Loan Borrower Bill of Rights
On October 11, the District of Columbia (DC) released a student loan borrower bill of rights (Bill) pursuant to the Student Loan Ombudsman Establishment and Servicing Regulation Amendment Act of 2016. The Bill sets out basic principles and protections for student loan borrowers, covering:
- Pricing and Terms. Lenders to comply with TILA; specifically, to focus on clear and plain-English disclosures of the APR and other key pricing terms.
- Loan Products. Lenders should avoid extending abusive loan products to borrowers; including, not extending new credit to borrowers who are unable to repay existing loans.
- Underwriting. Lenders should exercise fair and responsible underwriting; including offering loans that are affordable and meet the borrower’s needs. It also encourages lenders to engage in responsible credit reporting.
- Collection Activities. Lenders and servicers to abide by the spirit of the Fair Debt Collection Practices Act, as well as, maintain accurate and complete information about borrowers’ loans.
- Customer Service. Servicers should have responsible complaint management, be easily accessible, and avoid discrimination of any protected borrower classification.
The Bill became effective on September 8.