Mortgage Lenders & Servicers

In a recent ruling, the Seventh Circuit Court of Appeals held that plaintiffs stated a viable claim under the Fair Debt Collection Practices Act by alleging that a collection letter which included the safe harbor language set forth in Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, & Clark, LLC, 214 F.3d 872 (7th Cir. 2000), was false and misleading.  In reversing the lower’s court decision on which we previously reported, the Court of Appeals concluded that the letter’s reference to late and other charges was inaccurate, even though it came directly from the Miller safe harbor language, since the defendant could not lawfully impose such charges.  A link to the Seventh Circuit’s decision can be found here.

The letter at issue was an attempt to collect medical debts.  It recited verbatim the safe harbor language, including the statement of the amount of debt and a disclosure that “interest, late charges, and other charges … may vary from day to day … .”  The plaintiffs filed a class action asserting that the letter was misleading because the collector could not lawfully or contractually impose “late charges or other charges.”  In response, the collector argued that it was permitted to charge interest and that reference to late and other charges was not materially misleading.  The trial court agreed because “the central purpose of Miller’s safe harbor formula is to provide debt collectors with a way to notify debtors that the amounts they owe may ultimately vary.”  On appeal, the Seventh Circuit reversed dismissal of the plaintiffs’ claims.

In performing materiality analysis, the Court explained that, while debtors always have some incentive to pay variable debts quickly, the source of variability matters.  The letter did not specify how much the “late charges” are or what “other charge” may apply, “so consumers are left to guess about the economic consequences of failing to pay immediately.”  Because these additional fees and charges may be “a factor in [plaintiffs’] decision-making process,” the plaintiffs plausibly alleged that the letter was materially false or misleading.

The Court also found that the collector was not entitled to safe harbor protection because the Miller language was inaccurate under the circumstances in that the collector could not lawfully impose “late charges and other charges.”  The Court rejected the collector’s reliance on the Court’s earlier decision in Chuway v. Nat’l Action Fin. Servs., 362 F.3d 944 (7th Cir. 2004), wherein the Court instructed collectors to use the safe harbor language if “the debt collector is trying to collect the listed balance plus the interest running on it or other charges.”  Despite the apparent applicability of Chuway, the Court found that it was not persuasive because Chuway dealt with a fixed debt; therefore, the statement was arguably made in dicta.  The Court further stated that “in any event, our judicial interpretations cannot override the statute itself, which clearly prohibits debt collectors from [making] false or misleading misrepresentations.”  In support, the Court cited its recent controversial decision in Oliva v. Blatt, Hasenmiller, Leibsker & Moore LLC, 864 F.3d 492 (7th Cir. 2017), that effectively rejected the collector’s reliance on controlling law and found that the bona fide error defense did not apply.

Boucher highlights the need for customized compliance review of collection letters within the context of specific debts.  Such review must take into account not only whether the amount of debt is static or variable but also the sources of variability to help avoid claims of confusion and deception.

We previously reported on the Seventh Circuit Court of Appeals’ decision in Oliva v. Blatt, Hasenmiller, Leibsker & Moore, LLC, 864 F.3d 492 (7th Cir. 2017).  In Oliva, the sharply-divided Seventh Circuit held that the debt collector was liable under the Fair Debt Collection Practices Act even though the collector followed a longstanding law on venue selection, including the Seventh Circuit’s own controlling precedent at the time.  The Supreme Court has now denied the debt collector’s petition for review of the Oliva ruling.

As we explained in our previous post, the case arose out of the debt collector’s choice of venue in filing a collections lawsuit.  The debt collector relied on the Seventh Circuit’s 18-year-old controlling precedent interpreting the FDCPA’s venue provision and probably never foresaw that its entirely justified conduct would result in FDCPA liability.  The problem was that of timing.  During the pendency of the debt collection lawsuit, the Seventh Circuit overruled itself, thus rendering the debt collector’s choice of venue erroneous.  When the borrower sued, the trial court entered a judgment for the debt collector on the grounds of a bona fide error defense.  Sitting en banc, the Seventh Circuit reversed on the grounds that the new precedent applied retroactively and, therefore, the debt collector’s conduct violated the FDCPA even though it had not at the time of the conduct.  The Seventh Circuit also rejected the debt collector’s argument that its venue choice was subject to a bona fide error defense.

In its petition to the Supreme Court, the debt collector led with a quote from Justice Kennedy’s dissent in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich, L.P.A., 559 U.S. 573 (2010).  The majority in Jerman held that the bona fide error defense under the FDCPA applies to mistakes of fact and not mistakes of law,  no matter how justified.  In his dissent, Justice Kennedy predicted that the Supreme Court’s holding would result in liability where a debt collector follows a “particular practice [that] is compelled by existing precedent … if that precedent is later overruled.”

This is exactly what happened here.  As the debt collector emphasized, the issue with the Seventh Circuit’s expansive reading of Jerman is that it characterized the debt collector’s error as an unprotected “mistake of law” despite the undisputed fact that, at the time of the conduct at issue, there was no mistake at all.  To be sure, the debt collector’s choice of venue did not become a mistake until the Seventh Circuit changed its controlling precedent and retroactively applied it to the debt collector’s conduct after it took place.

As a result of the Supreme Court’s denial of the debt collector’s petition, the Seventh Circuit’s ruling stays in place, along with all the unfortunate ramifications that will likely follow.  In fact, the Seventh Circuit already relied on Oliva in a recent decision and held that a defendant’s reliance on the Seventh Circuit’s prior precedent did not absolve the defendant from liability under the FDCPA.

We will continue to monitor Oliva’s progeny as it develops.

According to a recent decision from the California Court of Appeal, mortgage lenders and servicers can, at least under certain circumstances, be “debt collectors” under the California Rosenthal Fair Debt Collection Practices Act, frequently referred to as the “Rosenthal Act.”.

In the case, plaintiff Edward Davidson filed a putative class action suing his mortgage servicer, Seterus, Inc., after allegedly receiving hundreds of phone calls from employees of Seterus demanding mortgage payments that Davidson had already paid or that were not yet due.  The alleged calls included threats to report negative credit information to the credit bureaus and to foreclose on Davidson’s home.  The trial court sustained Seterus’s demurrer, dismissing the complaint with prejudice based on the fact that a mortgage servicer may not be considered a debt collector under the Rosenthal Act.

The California Court of Appeal reversed the trial court’s ruling and held that Seterus and its parent company were subject to the Rosenthal Act for these alleged collection activities.

The Court noted that there is a split in authority among federal district courts that have interpreted the Rosenthal Act, that there is no California authority on the issue, and that there is no language specific to whether entities attempting to collect mortgage debt are subject to, or exempt from, the Rosenthal Act.  However, in adhering to the general principle that civil statutes enacted for the protection of the public should be broadly construed in favor of protecting the public, the Court held that the definitional language in the Rosenthal Act was sufficiently broad to include mortgage lenders and mortgage servicers.  The Court further discussed that collecting on a mortgage is the same as collecting on a consumer debt, which is governed by the Rosenthal Act.  The Court also noted that the definition of a “debt collector” under the Rosenthal Act is broader than its counterpart under the federal Fair Debt Collection Practices Act, which excludes mortgage servicers in certain circumstances.

The Court distinguished the body of case law holding that the foreclosure on a deed of trust does not constitute debt collection activity under the Rosenthal Act.  The Court noted that the present action does not involve foreclosure allegations and that it was not deciding whether a mortgage lender or mortgage servicer can be sued under the Rosenthal Act for any activity that the mortgage servicer undertakes with respect to a mortgage.  The Court held that this was a different question from the one they were currently addressing: whether a mortgage lender or mortgage servicer may ever be considered a debt collector under the Rosenthal Act, the answer to which is “yes.”

Mortgage lenders and mortgage servicers should evaluate this decision and review their policies and procedures in California to minimize potential liability under the Rosenthal Act.  Troutman Sanders is experienced in California debt collection and will continue to provide updates on new legislation, court decisions, and other legal developments in this area of law.

On February 16, a judge in the Eastern District of New York denied a defendant collection law firm’s motion to dismiss, finding that its collection letter violated the federal Fair Debt Collection Practices Act because it did not clearly set out that interest and fees may accrue on the “current balance.”

In Polak v. Kirschenbaum & Phillips, P.C., consumer plaintiff Israel Polak incurred a debt to a creditor, which hired the law firm Kirschenbaum & Phillips to collect upon default.  In turn, Kirschenbaum & Phillips sent Polak an initial collection letter referencing the amount due at the time of the charge off as $5,578.01 with a “Balance Due” of the same amount.  Kirschenbaum & Phillips further listed “Interest Accrued Since Charge-off” and “payments and Credits made as of the date of charge off” as $0.00.  The collection letter also contained the following statement:

“The amount reflected above is the amount you owe as of the date of this letter.  This amount may vary from day to day, due to interest and other charges added to your account after the date of this letter.  Hence, if you pay the amount shown above, an adjustment may be necessary after we receive your check in which we will inform you of your balance before depositing the check.”

Polak filed suit, alleging that Kirschenbaum & Phillips should have disclosed that “interest was accruing” or in the alternative, that “the creditor and or [sic] Defendant has made the decision to waive the accruing interest.”  Polak also alleged that the “threat of a balance increase” was coercive and constituted a “deceptive collection tactic” because the law firm knew that the balance would not vary at all during the collection of the debt.

Kirschenbaum & Phillips argued that the letter conformed to the safe harbor language approved in Avila v. Riexinger & Assoc., LLC.  The law firm further argued that the letter was accurate because while the creditor chose not to collect interest on Polak’s debt at that time, the creditor may do so in the future.  Therefore, Kirschenbaum & Phillips moved the Court to dismiss under Rule 12b(6), failure to state a claim.

In denying the motion, the Court held that a general disclosure that the balance may increase due to interest does not automatically shield a debt collector from liability when a different part of the collection letter provides inaccurate information, which makes the communication false, deceptive or misleading.  The Court further found that even if a debt collector accurately conveyed the required information, a consumer may still state an FDCPA claim if she successfully alleges that the least sophisticated consumer would inaccurately interpret the message.

Further, the Court also found that since the creditor “elected” not to collect interest during the time of collection, the interest was still in fact accruing by law.  According to the Court, Kirschenbaum & Phillips could have indicated that while no interest was being collected at that time, interest may accrue and could become due and owing at some point in the future.  At least by providing that information, the consumer would be able to determine what he will need to pay to resolve the debt at any given time in the future.

Polak further reinforces that the safe harbor language articulated in Avila does not shield debt collectors from liability if other language in the letter renders it confusing or misleading.  Collectors should review their letters for compliance in light of this judicial decision.  We will continue to monitor this area of the law as it develops.

In addition to the hotly litigated mandatory disclosure of the “amount of the debt,” the Fair Debt Collection Practices Act also requires a seemingly straightforward statement of “the name of the creditor to whom the debt is owed” as set forth in 15 U.S.C. § 1692g(a)(2).  However, even this requirement has given rise to a multitude of FDCPA lawsuits that share a common theme.  In particular, such claims exploit the difference between the creditors’ official business names and their “doing business as,” or commonly-used, names and acronyms.

This distinction creates a catch-22 situation for debt collectors because if they disclose the creditor by its full business name, they may—and they do—get sued under the FDCPA on the grounds that such disclosure is misleading since the creditor has communicated with the consumer using only its commonly-used name or acronym, not its official name.  Equally, disclosing a commonly-used moniker still results in consumer claims of deception for failure to list the name of the creditor by its “real” name.

In yet another recent variation of such claims, plaintiff Sergio Maximiliano filed an FDCPA lawsuit claiming that Simm Associates, Inc.’s demand letter was confusing because it included both names of the creditor—its commonly used acronym “PayPal Credit” and its official name “Comenity Capital Bank.”  The demand letter listed Paypal Credit as “Client” and Comenity as “Original Creditor.”  Simm Associates moved for summary judgment, arguing that Comenity held itself out as PayPal Credit for purposes of extending credit to Maximiliano and, thus, the demand letter was not confusing or misleading.  Maximiliano countered that Comenity does not normally transact business as PayPal; instead, it extends credit to customers in many retail stores and transacts business using the name of store-branded credit cards.  Maximiliano brought his claims not only under § 1692g but also under § 1692e that prohibits false and misleading representations.

The Court agreed with Simm Associates in finding that Maximiliano’s argument missed the point: at issue was not any least sophisticated consumer but the one who was “receiving the demand letter relating to his or her PayPal Credit account.”  The undisputed material facts revealed that such consumer was “unlikely to know that Comenity is the bank ultimately providing the credit” because none of the steps through which a consumer goes to obtain PayPal Credit account—from advertising to paying off the account—makes reference to Comenity.  The demand letter “left no room for confusion in the eyes of the least sophisticated consumer.”  It identified PayPal Credit as Simm Associates’ client and Comenity as the original creditor, as well as provided the amount of debt and the PayPal Credit account number.  The Court also rejected Maximiliano’s argument that Simm Associates had to identify Comenity as the “current creditor” and not the “original creditor.”  The Court noted that “[n]owhere in § 1692g is there a requirement that such verbiage be used.  All that is required is that the debt collector disclose the creditor to whom the debt is owed and [defendant] adequately satisfied this requirement.”

Citing the materiality threshold, the Court also gave short shrift to Maximiliano’s claims under § 1692e.  “Even accepting that there exists a hyper-technical FDCPA violation here, the Court’s review of the demand letter leads it to conclude that it is not material as there is nothing misleading about its content.”

The Court’s decision can be accessed here and is another example of a common-sense approach to resolving FDCPA “letter claims.”

On January 3, a coalition of 49 state attorneys general announced a $45 million settlement with PHH Mortgage Corporation, which was accused of misconduct related to its servicing of single-family residential mortgages.

In announcing the settlement, state attorneys general from across the country touted their commitment to holding mortgage companies responsible for any misconduct that harms consumers.  “We will remain committed to holding mortgage companies accountable for harms homeowners suffered from improper loan servicing, especially improper foreclosures,” said Virginia Attorney General Mark Herring.  New York Attorney General Eric Schneiderman echoed this sentiment in stating, “The foreclosure crisis continues to devastate communities across New York.  We have zero tolerance for the types of practices that helped create the crisis – and will hold mortgage companies to account.”

According to the complaint filed by the attorneys general, PHH:

  • Failed to timely and accurately apply borrower payments and failed to maintain accurate account statements;
  • Charged unauthorized fees for default-related services;
  • Threatened foreclosure and conveyed conflicting messages to borrowers engaged in loss mitigation;
  • Failed to properly respond to borrowers’ complaints and reasonable requests for information and assistance;
  • Failed to properly process borrowers’ applications for loan modifications;
  • Failed to properly oversee third-party vendors; and
  • Used incorrect, incomplete, or inadequate affidavits and other documents as part of foreclosure proceedings.

The settlement includes $31.4 million for borrowers, $5 million for attorneys’ fees and costs, and an $8.8 million penalty.  It also requires PHH to adhere to comprehensive mortgage servicing standards and audit and compliance reporting requirements.

Earlier this month, the Director of the Justice Department’s Civil Frauds Section issued a memorandum directing all DOJ attorneys evaluating False Claims Act (FCA) whistleblower cases to consider whether the government’s interests are best served by seeking a dismissal of questionable cases.  The memorandum was first published by The National Law Journal and is available here.

The memo appears to signify a significant shift in the way in which DOJ will view cases brought by private whistleblowers, also known as qui tam cases.  The FCA gives the government the right to seek dismissal over the plaintiff’s objection pursuant to 31 U.S.C. § 3730(c)(2)(A).  But, historically, DOJ has only moved to dismiss a very small percentage of such cases.  This historical reluctance has been frustrating to industries frequently hit by qui tam cases because even meritless cases can be expensive and time consuming to defend.

In addition to the apparent increased consideration of seeking dismissal, the memo also twice references the importance of consulting with any agency impacted by the qui tam complaint.  DOJ normally consults with affected client agencies on qui tam cases, but this could signal that at least for cases that meet the below criteria, DOJ will weigh agency input more heavily.

The memo recognizes that even when DOJ decides not to intervene in a case, the Department nonetheless expends significant resources in monitoring the case or responding to discovery or other issues.  Given that non-intervened cases are not cost or risk-free for the Government, the memo lists seven factors DOJ attorneys should consider when evaluating a case. These factors have served as bases for obtaining dismissals in the past and are not exclusive:

  • Meritless Qui Tam Case.  Are the complaint’s allegations factually frivolous; is the legal theory defective or did DOJ conclude that there was no merit after an investigation?
  • Duplicative of Ongoing Investigation. Conversely, does the qui tam duplicate an existing DOJ investigation without adding anything useful?
  • Conflicts with Agency Policy.  Is the agency relevant to the qui tam so concerned that it will interfere with its policies or programs so that the agency has recommended dismissal?
  • Interferes with Litigation Prerogatives.  For example, will non-intervened claims interfere with the Government’s ability to pursue intervened claims or will they lead to unfavorable precedent?
  • Endangers Classified Information.
  • Inefficient Use of Government Resources.  Is the case likely to cost the Government more than the Government will recover?
  • Egregious Procedural Errors. Has plaintiff’s counsel violated the seal or refused to cooperate with an investigation?

In some jurisdictions, dismissal under § 3730(c)(2)(A) is virtually automatic.  In others, courts employ a “rational basis” review of the motion that is generally deferential. The memo points out that the Government can move to dismiss on any number of legal grounds apart from or in addition to § 3730(c)(2)(A).

The memo also advises on appropriate process in handling a proposed dismissal. The Assistant Attorney General for the Civil Division must approve dismissal for all cases being handled jointly by a U.S. Attorney’s office and the Fraud Section.  If the case has been delegated to a U.S. Attorney’s office, the U.S. Attorney’s office must give the Fraud Section at least 10 days’ notice before filing a motion.   The memo notes that making these determinations early in a case is best practice, but there may be reasons that dismissal factors arise during the course of discovery.  Finally, the memo advises that when possible, DOJ attorneys should notify plaintiff’s counsel of the problems with the complaint and the intent to file the dismissal motion.

The true impact of the policy set forth in the memo and whether the number of qui tam dismissals will increase appreciably cannot be known for some time.  However, it is immediately useful to the FCA bar because it provides a roadmap of the factors that DOJ lawyers are considering as they review cases.  Defense counsel can strengthen their case-specific arguments in favor of declination or dismissal by connecting them to the factors and policy considerations described in the memo.

2017 was a transformative year for the consumer financial services world. As we navigate an unprecedented volume of industry regulation and forthcoming changes from the Trump Administration, Troutman Sanders is uniquely positioned to help its clients find successful resolutions and stay ahead of the compliance curve.

In this report, we share developments on consumer class actions, background screening, bankruptcy, credit reporting and consumer reporting, debt collection, payment processing and cards, mortgage, auto finance, the consumer finance regulatory landscape, cybersecurity and privacy, and the Telephone Consumer Protection Act (“TCPA”).

We hope you find this helpful as you navigate the evolving consumer financial services landscape.

ACCESS THE REPORT HERE

On December 14, the Supreme Court of Virginia reaffirmed in MCR Federal, LLC v. JB&A, Inc. that tort claims for actual and constructive fraud cannot stand where the source of the duty breached arises from the parties’ contractual relationship.  The Court’s holding is consistent with established precedent and is beneficial to the mortgage servicing industry in Virginia where relationships with borrowers arise from loan contracts such as a promissory note and a deed of trust.

Bringing suit in tort for misrepresentations has the obvious advantage of greater damage awards and the possibly of punitive damages.  However, in Virginia, the source of duty rule prevents “turning every breach of contract into an actionable claim for fraud.”  (It is important to note that the source of duty rule does not bar a tort claim to the extent the breach is a statutory or common law duty.)

In MCR Federal, the Court analyzed the breach of warranties in a bring down certificate in an acquisition between two government contractors.  The bring down certificate was a condition precedent to the sale, and the breach occurred at closing where the buyer falsely stated that a representation in the bring down certificate remained true.  The trial court found the buyer liable for breach of contract and constructive fraud, and awarded damages and attorneys’ fees as equitable relief.

On appeal, the Supreme Court agreed with the buyer that any duty between the parties arose solely by virtue of the purchase agreement, barring the seller’s actual and constructive fraud claims.  The Court noted that “[t]he fact that the delivery of the bring down certificate was a condition precedent to closing rather than a contractual duty, ‘does not take the fraud outside of the contractual relationship.’”  But for the purchase agreement, the buyer had no duty to provide the seller with the certificate.

While the Court’s opinion also addressed causation and damages, its holding on the source of duty rule is particularly beneficial to the mortgage industry in Virginia where breach of contract claims are sometimes paired with claims of fraud.

On December 12, a federal judge dismissed a challenge to the Office of the Comptroller of the Currency’s proposal to issue special purpose national bank charters to financial technology firms, finding that the plaintiff – the New York State Department of Financial Services – lacks standing and that the claims asserted are not ripe because the OCC’s proposal is not yet final.

The OCC’s proposal emerged from an initiative to promote innovation in the financial services industry. In August 2015, the OCC announced its intent to develop a “framework to evaluate new and innovative financial products and services.”[1] According to the OCC, that effort was necessary because of the perception, shared by many fintech firms, that it is “too difficult to get new ideas through the regulatory approval process.”[2]

In September 2016, the OCC announced that, as part of its innovation initiative, it was “considering how best to implement a regulatory framework that is receptive to responsible innovation, such as advances in financial technology,” and “whether a special purpose charter could be an appropriate entity for the delivery of banking services in new ways.”[3] And in December 2016, the OCC requested public comments on “whether it would be appropriate for the OCC to consider granting a special purpose national bank charter to a fintech company.”[4]

The OCC’s announcement and request for public comment kicked off a vigorous debate. State regulators, including the New York State Department of Financial Services, submitted comments to the OCC opposing its proposal. But many fintech firms welcomed the proposal and submitted comments to the OCC supporting it.

Then, in response to signals that the OCC was moving forward with its proposal, the New York State Department of Financial Services filed a lawsuit challenging the OCC’s authority to do so.

The Department alleged that the OCC’s proposal exceeds its statutory authority and violates the Tenth Amendment of the U.S. Constitution. Those causes of action were grounded in perceived harms. Specifically, the Department alleged that the OCC’s proposal would be “destructive” and would cause “concrete harm to New York’s financial market stability and consumer protection controls.”[5]

Without addressing the merits of those allegations, however, U.S. District Court Judge Naomi Reice Buchwald found that the Department lacks standing and that its claims are not ripe because, according to the Court, the OCC “has not reached a final ‘Fintech Charter Decision.’”[6]

According to Judge Buchwald, the Department’s “alleged injuries will only become sufficiently imminent to confer standing once the OCC makes a final determination that it will issue [special purpose national bank] charters to fintech companies.”[7]

Because Judge Buchwald dismissed the Department’s complaint without prejudice, we expect the Department to promptly refile its complaint if the OCC finalizes its proposal to issue national bank charters to fintech firms.

_____________________

[1] See Remarks of Thomas J. Curry, Comptroller of the Currency, Before the Federal Home Loan Bank of Chicago. August 7, 2015 (https://www.occ.gov/news-issuances/speeches/2015/pub-speech-2015-111.pdf) (hereinafter, “Remarks”).

[2] Id.

[3] See Proposed Rulemaking, Receiverships for Uninsured National Banks, 81 Fed. Reg. 62,835 (Sept. 13, 2016).

[4] Office of the Comptroller of the Currency, “Exploring Special Purpose National Bank Charters for Fintech Companies,” December 2016 (https://www.occ.gov/topics/responsible-innovation/comments/special-purpose-national-bank-charters-for-fintech.pdf).

[5] Complaint, Vullo v. Office of the Comptroller of the Currency, No. 1:17-cv-03574 (S.D.N.Y. filed May 12, 2017), ECF No. 1.

[6] Order, Vullo v. Office of the Comptroller of the Currency, No. 1:17-cv-03574 (S.D.N.Y. entered Dec. 12, 2017), ECF No. 30.

[7] Id.