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Ninth Circuit Holds Repeated Erroneous Default Notices Can Be ECOA Adverse Action
On July 3, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit held that a mortgage servicer’s alleged repeated delivery of notices of default and acceleration to borrowers who were current on their obligation could be “adverse action,” triggering the ECOA notification requirements. Schlegel v. Wells Fargo Bank, No. 11-6816, 2013 WL 3336727 (9th Cir. July 3, 2013). According to the borrowers, although they received a discharge in bankruptcy, they reaffirmed their mortgage loan, subject to a modification that apparently reduced their monthly payment obligation. The borrowers claimed that the servicer did not correct its records to reflect the loan modification and sent several notices of default and acceleration. The Ninth Circuit held that, while sending a mistaken default notice would not necessarily constitute an adverse action, the conduct alleged in the complaint, in which the creditor repeatedly stated that the obligation was immediately due and payable, fell within the definition of an “adverse action” as, among other things, a “revocation of credit.” Therefore, the court reversed the district court’s dismissal of the borrowers’ claim that the mortgage servicer had failed to provide a notification within 30 days after taking adverse action, as required under ECOA. The appellate court, however, upheld the district court’s dismissal of the borrowers’ claim under the FDCPA, holding that the complaint failed to adequately allege that the servicer was a “debt collector” under the FDCPA — i.e., either that its principal business was the collection of debts or that it was collecting the subject debt “for another.”
CFPB Puts Creditors, Third-Party Collectors on Notice Regarding Unfair, Deceptive, and Abusive Debt Collection Practices
On July 10, the CFPB issued new debt collection guidance that, among other things, seeks to hold CFPB-supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive (UDAAP) when collecting their own debts, in much the same way debt collectors are held accountable for violations of the FDCPA. Bulletin 2013-07 reviews the Dodd-Frank Act UDAAP standards, provides a non-exhaustive list of debt collection acts or practices that could constitute UDAAPs, and states that even though creditors generally are not considered debt collectors under the FDCPA, the CFPB intends to supervise their debt collection activities under its UDAAP authority.
Separately, in Bulletin 2013-08, the CFPB provided guidance to creditors, debt buyers, and third-party collectors about compliance with the FDCPA and sections 1031 and 1036 of Dodd-Frank when making representations about the impact that payments on debts in collection may have on credit reports and credit scores. The Bulletin states that potentially deceptive debt collection claims are a matter of “significant concern” to the CFPB and describes the CFPB’s planned supervisory activities and other actions the CFPB may take to ensure that the debt collection market “functions in a fair, transparent, and competitive manner.”
In addition, the CFPB announced that it will begin accepting consumer complaints related to debt collection, and published five “action letters” that consumers can use to correspond with debt collectors. The letters address the situations when the consumer: (i) needs more information on the debt; (ii) wants to dispute the debt and for the debt collector to prove responsibility or stop communication; (iii) wants to restrict how and when a debt collector can contact them; (iv) has hired a lawyer; (v) wants the debt collector to stop any and all contact.
Second Circuit Holds Writing Requirement for Debt Challenge Violates FDCPA
On May 29, in a case of first impression for that circuit, the U.S. Court of Appeals for the Second Circuit held that a debt collector’s collection notice requiring a debtor to dispute a debt in writing violated the FDCPA’s debt notice provisions, provided for in Section 1692g. Hooks v. Forman, Holt, Eliades & Ravin, LLC, No. 12-3639, 2013 WL 2321409 (2nd Cir. May 29, 2012). In so holding, the Second Circuit joined the Ninth Circuit but split from the Third Circuit, which has held that a notice imposing a written requirement does not violate the FDCPA. Here, a district court dismissed a case brought by two debtors in a putative class action against a debt collector for allegedly violating the FDCPA by including in debt notices a requirement that debt disputes be submitted in writing. On appeal, the Second Circuit held that language of Section 1692g(a)(3), which provides the basic right to dispute the debt, does not incorporate the writing requirement included specifically in other sections of 1692g. The court held that the FDCPA intentionally established a bifurcated system that allows a debtor to protect that basic right through an oral dispute, while triggering a broader set of rights by disputing a debt in writing. The court vacated a judgment of the district court and remanded for further proceedings.
CFPB Presents Annual FDCPA Report
On March 20, the CFPB presented to Congress its annual report on implementation and enforcement of the FDCPA. The report (i) summarizes the Bureau’s Consumer Response function, which does not currently cover debt collection complaints, and the number and types of consumer complaints regarding debt collection received by the FTC in 2012, (ii) describes the CFPB’s debt collection supervision program, (iii) presents recent enforcement and advocacy program developments, (iv) discusses recent education and outreach, as well as research and policy initiatives, and (v) discusses coordination and cooperation between the CFPB and the FTC. Because the FTC and the CFPB share FDCPA implementation and enforcement responsibilities, the report incorporates a letter from the FTC regarding its FDCPA-related activities. The CFPB reported that the FTC continues to receive more complaints for the debt collection industry than for any other. The report also highlights (i) the debt collection aspects of a CFPB enforcement action against a credit card company, (ii) the Supreme Court’s recent decision upholding court discretion to award costs to prevailing FDCPA defendant creditors, and (iii) FTC enforcement activities.
U.S. Supreme Court Upholds Discretion to Award Costs to Prevailing FDCPA Defendant Creditors
On February 26, the U.S. Supreme Court held that the FDCPA does not limit a court’s discretion under federal rules to award costs to a prevailing defendant creditor alleged to have violated the Act. Marx v. Gen. Revenue Corp., No. 11-1175, 2013 WL 673254 (Feb. 26, 2013). The Tenth Circuit had earlier held that the defendant creditor did not violate the FDCPA, and that the creditor could be awarded costs under Federal Rule of Civil Procedure 54(d)(1). On appeal, the debtor, supported by the United States as amicus, argued that any statute specifically providing for costs displaces Rule 54(d)(1), regardless of whether it is contrary to the Rule. The relevant FDCPA provision, §1692k(a)(3), provides that “[o]n a finding by the court that an action under this section was brought in bad faith and for the purpose of harassment, the court may award to the defendant attorney’s fees reasonable in relation to the work expended and costs.” The Court affirmed the Tenth Circuit and held that the language and context of §1692k(a)(3) indicate that Congress did not intend it to prohibit courts from awarding costs. The Court explained that (i) the statute is best read as codifying a court’s pre-existing authority to award both attorney’s fees and costs, (ii) by including “and costs” in the second sentence of the statute, Congress foreclosed the argument that defendants can only recover attorney’s fees when plaintiffs bring an action in bad faith and removed any doubt that defendants may also recover costs in such cases, and (iii) the statutory language sharply contrasts with that of other statutes in which Congress has placed conditions on awarding costs to prevailing defendants.
FTC Recaps Debt Collection Activities for Annual CFPB Report
On February 1, the FTC sent a letter to the CFPB describing the FTC's debt collection-related activities over the past year. The responsibility to report to Congress each year on implementation and enforcement of the FDCPA shifted from the FTC to the CFPB last year, but given their shared authority with regard to the FDCPA, the CFPB relies on the FTC to provide information for inclusion in its annual report. The FTC letter recaps the agency's law enforcement efforts, including the filing or resolution of four actions against collectors alleged to have engaged in deceptive, unfair, or abusive conduct and the filing or resolution of three actions related to phantom debt collection. The letter also highlights outreach and policy activities, including the FTC's recent debt buyer study.
Sixth Circuit Holds That Mortgage Foreclosures are Debt Collections Under the FDCPA
On January 14, the U.S. Court of Appeals for the Sixth Circuit held that mortgage foreclosures are debt collections under the FDCPA. Glazer v. Chase Home Finance LLC, No. 10-3416, 2013 WL 141699 (6th Cir. Jan. 14, 2013). The decision rejects the view held by a majority of district courts, including the district court in this case, that mortgage foreclosures are generally outside the scope of the FDCPA because they are enforcements of a security instrument, not attempts to collect money. In this case, the borrower brought suit alleging that the law firm that attempted to foreclose on his property violated the FDCPA, and the district court dismissed the claim, ruling that foreclosures are not debt collections. In reaching its conclusion, the Sixth Circuit reasoned that “whether an obligation is a ‘debt’ depends not on whether the obligation is secured, but rather upon the purpose for which it was incurred.” The court explained that collecting such a debt can occur through personal solicitation or legal proceedings. As such, the court held that “every mortgage foreclosure, judicial or otherwise, is undertaken for the very purpose of obtaining payment on the underlying debt,” and, therefore, every mortgage foreclosure is a debt collection. Further, the court held that lawyers who meet the general definition of “debt collector” must comply with the FDCPA when engaged in a mortgage foreclosure. The Sixth Circuit reversed the district court’s dismissal and remanded the case for further proceedings.
California District Court Holds Assignee Indirect Auto Finance Company Not Subject to FDCPA
On January 9, the U.S. District Court for the Central District of California held that an indirect auto finance company that took assignment of a retail installment sales contract from an automobile dealer is not a debt collector subject to the FDCPA. Tu v. Camino Real Chevrolet, No. 12-9456, 2013 WL 140278 (C.D. Cal. Jan. 9, 2013). As the court explained, FDCPA Section 1692a(6) defines a “debt collector” to include any person who uses any instrumentality of interstate commerce or the mails for the principle purpose of enforcing security interests. In this case, a customer purchased and financed a car with a dealer who subsequently assigned the retail installment sales contract to an auto finance company. When the borrower fell behind on his payments and the finance company tried to collect the debt, the borrower sued the finance company, alleging violations of the FDCPA. The court held that the finance company was primarily in the business of accepting installment sales contracts with its debt collection activities ancillary to its financing activities. Therefore, the finance company is not a debt collector as defined by the FDCPA. The court dismissed the borrower’s claims.
Eleventh Circuit Holds Management Company Collecting HOA Fees Exempt from FDCPA
Recently, the U.S. Court of Appeals for the Eleventh Circuit held that a management company collecting debts for a homeowners association was exempt from the FDCPA because collecting the unpaid assessments was incidental to the company’s bona fide fiduciary obligations. Harris v. Liberty Cmty. Mgmt., Inc., No. 11-14362, 2012 WL 6604518 (11th Cir. Dec. 19, 2012). In Harris, a homeowners association contracted with a management company to perform various tasks, including collecting past due assessments from homeowners. After warning the plaintiffs that their water service would be disconnected if they did not pay their outstanding association dues, the management company had their water service suspended. The plaintiffs asserted that the company was a debt collector under the FDCPA and violated the Act by terminating their water service. Under Section 1692a(6)(F)(i) of the FDCPA, an individual or entity is exempt from the Act when “collecting or attempting to collect any debt owed…another to the extent such activity is incidental to a bona fide fiduciary obligation.” The Eleventh Circuit held that the management company fell within this exemption. Because the company was the homeowners association’s agent, it owed a fiduciary duty to the association. The court also found that collecting the debts was “incidental” to the company’s fiduciary obligation, noting that the company did many other tasks for the association other than collect assessments, such as obtaining utilities, purchasing insurance, and assisting the association with its tax filings. In addition, the Eleventh Circuit affirmed the district court’s dismissal of the plaintiffs’ claims under the Georgia Fair Business Practices Act. The court explained that the management company’s decision to stop the water service after providing the plaintiff notice was not unfair or deceptive.
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.