Mortgage Lenders & Servicers

As Congress’ emboldened majority has sought to lessen the federal government’s regulatory footprint, the states have not always been quiet, as one summertime example amply shows.

In 2017, two congressmen introduced two bills which, if enacted, would expand the scope of federal preemption to include non-bank entities. Introduced by Rep. Patrick McHenry (R-N.C.), the first of these two bills – the Protecting Consumers’ Access to Credit Act of 2017 (HR 3299) – states that bank loans with a valid rate when made will remain valid with respect to that rate, regardless of whether a bank has subsequently sold or assigned the loan to a third party. A second bill known as the Modernizing Credit Opportunities Act of 2017 (HR 4439), championed by Rep. Trey Hollingsworth (R-Ind.), strives “to clarify that the role of the insured depository institution as lender and the location of an insured depository institution under applicable law are not affected by any contract between the institution and a third-party service provider.” Perhaps most significantly, it would establish federal preemption of state usury laws as to any loan to which an insured depository institution is the party, regardless of any subsequent assignments. In so doing, both bills amend provisions of the Home Owners’ Loan Act, Federal Credit Union Act, and/or Federal Deposit Insurance Act. Such an amendment would invalidate a long-line of judicial precedent barring a non-bank buyer’s ability to purchase a national bank’s right to preempt state usury law, which culminated in the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC, and thereby provide non-originating creditors with a potent – and until now nonexistent – shield against liability under certain state consumer laws.

On June 27, 2018, the attorneys general of twenty states[1] and the District of Columbia stated their opposition to both bills in a letter to Congressional leadership. Beginning with an historically accurate observation – “[t]he states have long held primary responsibility for protecting American consumers from abuse in the marketplace” – the A.G.s attacked these legislative efforts as likely to “allow non-bank lenders to sidestep state usury laws and charge excessive interest that would otherwise be illegal under state law.” The cudgel of preemption, they warned, would “undermine” their ability to enforce their own consumer protection laws. The A.G.s went on to argue many non-bank lenders “contract with banks to use the banks’ names on loan documents in an attempt to cloak themselves with the banks’ right to preempt state usury limits”; indeed, “[t]he loans provided pursuant to these agreements are typically funded and immediately purchased by the non-bank lenders, which conduct all marketing, underwriting, and servicing of the loans.” For their small role, the banks “receive only a small fee,” with the “lion’s share of profits belong[ing] to the non-bank entities.” In support of this position, the A.G.s cite to a 2002 press release by the Office of the Comptroller of the Currency (“OCC”) and the more recent OCC Bulletin 2018-14 on small dollar lending, the latter announcing the OCC’s “unfavorabl[e]” view of “an[y] entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).

The A.G.s concluded by arguing that the proposed legislation would erode an “important sphere of state regulation,” state usury laws having “long served an important consumer protection function in America.”

We will continue to monitor this legislation and other developments in the preemption arena, and will report on any further developments.


[1] The signatories come from California, Colorado, Hawaii, Illinois, Iowa, Maryland, Massachusetts, Minnesota, Mississippi, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, and Washington.

The West Virginia Consumer Credit and Protection Act (“WVCCPA”) is a remedial statute designed to protect West Virginia consumers from improper debt collection.  Only “consumers” have standing to file a lawsuit under the WVCCPA.  The term “consumer” is defined as a natural person that owes a debt or allegedly owes a debt.  But does a person still owe debt if that debt was discharged by a bankruptcy court?  Although there is some conflicting case law in West Virginia, an answer is forming. 

Bankruptcy courts have ruled that a discharge in bankruptcy does not cancel or extinguish debt; only the debtor’s personal liability for payment is discharged.  The debtor is not compelled to make payments, and the debt collector cannot file a lawsuit to collect the debt.  However, the debt still exists, and if not paid, the debt collector can repossess collateral such as through a foreclosure sale or repossession of an automobile.  If the debtor could lose their property if they do not make the payments, does that mean they still “owe a debt?”  Can they still sue under the WVCCPA for improper attempts to collect that debt?

West Virginia state and federal courts have mostly come down on one side of this issue, ruling that if a debt was discharged in bankruptcy, then the debtor is no longer obligated to pay the debt and, and such, the debtor is not a consumer with standing to sue under the WVCCPA.  Claims under the WVCCPA regarding discharged debts have been dismissed in both West Virginia state and federal courts. 

However, there is an outlier.  Specifically, Judge Gray Silver III of the Circuit Court of Berkeley County ruled in Cookus v. Westlake Serv., LLC, that the natural obligation to repay the debt still exists after bankruptcy as evidenced by the fact that Congress saw fit to remind debtors that they may still voluntarily repay their debts.  He also argued that because these debts can be revived if the bankruptcy action is reopened, “it is absolutely incorrect to state that an obligation ceases to exist as of the date of the discharge, otherwise the obligations could not be reasserted in any way.”  The discharged debtor in that case had standing to sue under the WVCCPA. 

The majority approach appears more equitable for both parties to the debt.   It is only fair that if a debt collector cannot sue to collect a debt, then the debtor should not be able to sue the debt collector for improper collection of that same debt.  The debtor chose to discharge the debt and could have chosen instead to reaffirm the debt in the very same bankruptcy action. 

This issue has not reached the West Virginia Supreme Court of Appeals, and until then there is no definitive answer as to how a bankruptcy discharge affects claims under the WVCCPA.  However, Judge Silver has recently retired from the bench and the majority of case law (including subsequent case law in the Circuit Court of Berkeley County) favors dismissal of WVCCPA claims with respect to discharged debts.   

Troutman Sanders will continue to monitor this issue.

In a recent decision dismissing a purported class action against Zillow Group, Inc., launched by disgruntled purchasers of the company’s securities, the United States District Court for the Western District of Washington provided a remarkably thorough—and an eminently useful—distillation of the federal judiciary’s emergent application of the Real Estate Settlement Procedures Act of 1974 (“RESPA”) to today’s increasingly popular co-marketing programs.  To the many defendants potentially subject to this statute, this opinion offers a roadmap for minimizing their legal exposure and defeating liability.

Background

Program at Issue

To this day, Zillow generates the majority of its revenue through advertising sales to real estate professionals. With $150 million in cash in the winter of 2013, Zillow launched a new advertising product, a then-unique co-marketing program (herein referred to as “the Program”). This Program allows participating mortgage lenders to pay a percentage of a real estate agent’s advertising costs directly to Zillow in exchange for appearing on the agent’s listings and receiving some of the agent’s leads. (“Leads” are created whenever a user views an agent’s listing on Zillow and decides to send their contact information to the agent directly.) In return for this payment, the participating lenders appear on the co-marketing agent’s listings as “preferred lenders,” their picture and contact information appended. When a user chooses to provide an agent with their contact information, Zillow automatically dispatches their personal information to the co-marketing lender, unless the user affirmatively opts out. “Because users are able to opt out of sending their contact information,” the Court explained, “lenders receive, on average, 40% of the leads received by their co-marketing agents.”

Prior to 2017, an individual lender could pay up to 50% of a co-marketing agent’s advertising costs, and up to five lenders could collectively pay 90%. If a single lender co-marketed with an agent, that lender appeared on all of the agent’s listings. But when multiple lenders co-marketed with a single agent, each lender appeared randomly on the agent’s listings based on that lender’s pro-rata share of the agent’s overall advertising spend.

Relevant Law

RESPA focuses on consumers in the market for real estate “settlement services,” defined as encompassing “any service provided in connection with a real estate settlement, including, but not limited to” title searches, title insurance, attorney services, document preparation, credit reports, appraisals, property surveys, loan processing and underwriting, and the like. This statute aims to curtail the cost of real estate transactions by promoting the disclosure of “greater and more timely information on the nature and costs of the settlement process” and by protecting consumers from “unnecessarily high . . . charges caused by certain abusive practices.”

RESPA’s eighth section focuses on the elimination of kickbacks and unearned fees. Dealing with “business referrals,” Section 8(a), as codified in 12 U.S.C. § 2607(a), prohibits giving or accepting “any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” Courts commonly find a violation of Section 8 when all of the following elements are present: (1) a payment or thing of value was exchanged, (2) pursuant to an agreement to refer settlement business, and (3) there was an actual referral.  Section 8(b) further cabins liability under this provision: “No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.” This part of RESPA concludes with a safe harbor permitting “[a] payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”

Instant Case

Plaintiffs’ Relevant Claims

In their amended complaint, Plaintiffs attacked the Program for violating RESPA’s Section 8 in “two overarching ways.” First, they characterized the co-marketing program as an impermissible “vehicle to allow real estate agents to make illegal referrals to lenders in exchange for the lenders paying a portion of the agents’ advertising costs to Zillow.” As Plaintiffs’ alleged, “Defendants created the co-marketing program to allow real estate agents to steer prospective home buyers to mortgage lenders, in exchange for the lenders paying a portion of the agent’s advertising costs to Zillow.”  Second, the Program, they insisted, “allow[ed] lenders to pay a portion of their agents’ advertising costs that was in excess of the fair market value for the advertising services they actually receive.” Either theory, if accepted, would have left Zillow exposed to liability under RESPA.

Court’s Opinion

In trenchant prose, the Court found neither basis to be sufficiently pled under the heightened standard applicable to fraud claims.

The Court discerned no iota of legal or factual viability in Plaintiffs’ first theory: “that the co-marketing program is per se illegal because it allowed agents to make referrals in exchange for lenders paying a portion of their advertising costs.” Although Plaintiffs rested much of this theory on PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1 (D.C. Cir. 2016), the Court noted its rejection of the broad theory of RESPA liability espoused by the Consumer Financial Protection Bureau. Instead, as the Court stressed, the D.C. Circuit had “held that RESPA’s safe harbor allows mortgage lenders to make referrals to third parties on the condition that they purchase services from the lender’s affiliate, so long as the third party receives the services at a ‘reasonable market value,’” an approach pioneered by the Ninth Circuit’s Geraci v. Homestreet Bank, 347 F.3d 749 (9th Cir. 2003).

Under this precedent, the Complaint failed for three reasons. First, the Program, as depicted by Plaintiffs themselves, only “allows agents and lenders to jointly advertise their services without requiring agents to refer business to lenders.” Because it does not “explicitly involve … the referral of mortgage insurance business in exchange for the purchase of re-insurance from the referring business,” it falls beyond RESPA’s purview. Second, the Complaint utterly lacked enough “particularized facts demonstrating that co-marketing agents were actually providing unlawful referrals to lenders.  Third, even if “co-marketing agents were making mortgage referrals, such referrals would fall under the Section 8(c) safe harbor because lenders received advertising services in exchange for paying a portion of their agent’s advertising costs.”

Rather than a trio, one reason alone doomed Plaintiffs’ second theory. To wit, despite “explain[ing] in detail how the . . . [P]rogram is structured,” Plaintiffs had failed to allege, with the requisite specificity, that “specific co-marketing lenders were paying more than fair market value for the advertising services they received from participating in the program.”  As one example, the Court pointed to Plaintiffs’ failure to allege that one co-marketing agent provided a mortgage referral to a specific lender in exchange for that lender paying an amount to Zillow that was above the market value of the advertising services it received. That some lenders refused to pay more than 31% of an agent’s advertising costs, it pointed out, did not render that percentage equivalent to the relevant service’s fair market value. Some more definite and precise allegations, entirely missing from the complaint, were necessary.

Potential Impact

The Decision holds a distinct promise for defendants in RESPA actions based on co-marketing programs similar to Zillow’s own.

Specifically, it shows how potent RESPA Section 8’s safe harbor, as previously construed by the D.C. Circuit in PHH Corp. and the Ninth Circuit in Geraci, can be at the pleading stage. Within this growing line of caselaw, this provision has been read to authorize lenders to pay a portion of their agents’ advertising costs, so long as those payments reflect the fair market value for the advertising services they actually receive. A plaintiff’s failure to allege, with specificity, how precisely a lender’s payment exceeds the market value could thus readily set their complaint up for prompt dismissal.

In short, in the wake of Zillow’s victory, well- and carefully-designed co-marketing programs today stand on firmer legal ground.

In a victory for mortgage lenders and servicers, the Virginia Supreme Court held on September 27 that Virginia’s five-year statute of limitations for a breach of contract claim based on a deed of trust begins to run when the loan is accelerated – not when a foreclosure sale is held much later.

By way of background, most Virginia deeds of trust, including the one at issue in Kerns, require the lender to send a written notice of default to the borrower before accelerating the loan debt and foreclosing. Among other requirements, the notice of default typically must notify the mortgagor of the default and allow the mortgagor at least thirty days to cure the default.

In 2008, the Virginia Supreme Court held that giving this notice of default to the borrower is a contractual condition precedent to acceleration of the debt and foreclosure. If not given, a mortgagor may be able to bring a viable breach of contract claim and seek damages if the foreclosure has been completed. This ruling has given rise to a plethora of cases by defaulting borrowers seeking to avoid foreclosure and eviction by disputing the notice of default’s contents or claiming that it was never given.

In Kerns, the mortgagor acknowledged that the lender had given him a notice of default dated June 20, 2010.  A foreclosure sale was held on August 23, 2011.  Exactly five years after the foreclosure sale, on August 23, 2016, Kerns filed a breach of contract lawsuit asserting, for the first time, a proper notice of default was never given.

Kerns’ theory was that the notice of default was defective because it was not mailed until June 21, 2010 – one day after the date that appeared on the notice – depriving the mortgagor of the full thirty days to cure the default.  Relying on the 2008 Virginia Supreme Court ruling mentioned above, the mortgagor argued that because the notice of default was defective, the lender never acquired any right to accelerate the loan or foreclose.

The trial court dismissed Kerns’ complaint, finding that it was barred by Virginia’s five-year statute of limitations applicable to claims for breach of a written contract. It held that the breach of contract claim accrued, and the statute of limitations began to run, when the loan was accelerated – not years later when the foreclosure sale auction is held and the mortgagor’s interest in the secured property is extinguished.

The Virginia Supreme Court affirmed, holding that the trial court did not err in finding that the statute of limitations clock started to run on the date the loan accelerated.  In its precedential opinion, the Court acknowledged that the mortgagor’s breach of contract claim accrues when a “legally cognizable harm” is suffered by the plaintiff and that any act which “impermissibly alter[s] the legal relationship between the parties” may fall into this category.

Kerns is significant in that it clarifies a previously unsettled issue and gives mortgage lenders and servicers more control over when a mortgagor’s alleged breach of contract claims will accrue. That is, once a notice of default has been given and the time to cure the default has elapsed, the lender or servicer can unilaterally and without further notice decide when to accelerate the loan.  Therefore, it will be important for lenders and servicers doing business in Virginia to clearly document a loan’s date of acceleration in its records, so that stale claims – like those raised in Kerns – will not impede attempts to foreclose or recover possession of the secured property.

On September 24, the Court of Appeals for the Eleventh Circuit in Patel v. Specialized Loan Servicing, LLC ruled that a group of plaintiffs from Florida and Pennsylvania could not challenge the forced-placed insurance (“FPI”) rate their mortgage servicers charged.  Because the plaintiffs did not purchase homeowner’s insurance, the mortgage servicers purchased FPI for the properties through American Security Insurance Company (“ASIC”).  The plaintiffs alleged that the mortgage lenders received “rebates” or “kickbacks” from ASIC and brought claims for breach of contract and unjust enrichment, as well as for alleged violations of the Truth in Lending Act, the Racketeer Influenced and Corrupt Organizations Act, and the Florida Deceptive and Unfair Trade Practices Act. 

The Eleventh Circuit held that the plaintiffs could not challenge the insurance rate charged by ASIC under the filed-rate doctrine, which prevents any judicial action that undermines agency rate-making authority.  The legislatures of Florida and Pennsylvania require insurers to get approval from state administrative agencies as to the reasonableness of insurance rates.  Thus, the plaintiffs could not bring suit challenging the insurance rates without first following the statutory mechanisms provided by the Florida and Pennsylvania statutes. 

The case is notable because the Eleventh Circuit held that the filed-rate doctrine also barred the plaintiffs from suing their mortgage servicers for the alleged insurance-kickback scheme, even for alleged breaches of their mortgage contracts.  While the mortgage servicers were not directly regulated, they simply charged the rate ASIC—the regulated entity—filed and had approved by the state agencies.  To allow the plaintiffs to sue their mortgage servicers would have allowed them to do indirectly what they could not do directly: challenge the insurance rates the regulators approved.  

Troutman Sanders will continue to monitor these developments and provide any further updates as they are available.

Despite two controlling decisions by the Second Circuit in Avila and Taylor, claims involving the “amount of debt” disclosure under the Fair Debt Collection Practices Act (“FDCPA”) continue to evolve thanks to the relentless efforts by the New York plaintiffs’ bar.  But these permutations of the “amount of debt” claims continue to be successfully pushed back by defendants.  In a recent ruling, the United States District Court for the Eastern District of New York granted summary judgment in a debt collector’s favor and held that the collector was not required to disclose that the balance could increase due to a prospective award of costs in a state court action.  A link to the decision can be found here.

Defendant Selip & Stylianou, LLP sent consumer plaintiff James Stewart a letter advising him that it was initiating a lawsuit in state court to collect an outstanding debt with a balance of $3,182.84.  The letter also advised Stewart that the legal documents had already been filed.  The complaint in the state court action sought costs associated with the lawsuit, but the letter did not disclose that the balance could increase due to such costs.  Stewart sued the debt collector, claiming that the letter was false and misleading since it failed to disclose the potentially increasing nature of the outstanding balance.

On summary judgment, Selip & Stylianou submitted an affidavit demonstrating that the amount of debt was static because no interest or fees accrued on the debt.  The affidavit further explained, “Only if legal action is commenced against a consumer does [creditor] seek actual disbursements incurred associated with any lawsuit, and even then only upon entry of judgment and only for the amount awarded in the judgment entered by the court.”  Despite this sworn explanation, Stewart still argued that, because Selip & Stylianou was seeking costs incurred in prosecuting the state court action, the payment of the full amount disclosed on the face of the letter would have not satisfied the debt and the balance was thus not static.  The Court disagreed and found that the balance remained static “even after the commencement of the [s]tate [c]ourt [a]ction because costs had not been awarded, and in fact, might never be awarded.”  The Court also pointed out that subsequent letters which stated the same balance further undermined Stewart’s claims and that summary judgment in Selip & Stylianou’s favor was appropriate.

“Amount of debt” claims remain risky because an outstanding balance is listed in every collection letter and periodic compliance review is crucial due to the rapidly evolving precedent.  Troutman Sanders will continue to monitor this line of cases.

On October 17, the Office of Information and Regulatory Affairs released the CFPB’s fall 2018 rulemaking agenda.  In the preamble to the agenda, the CFPB notes that the agenda lists the regulatory matters that the agency “reasonably anticipates having under consideration during the period from October 1, 2018 to September 30, 2019.”

Implementing Statutory Directives.  According to the CFPB, much of its rulemaking agenda focuses on implementing statutory directives.  Those statutory directives include:

  • The directive by the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) that the CFPB engage in rulemaking to (1) exempt certain creditors with assets of $10 billion or less from certain mortgage escrow requirements under the Dodd-Frank Act, and (2) develop standards for assessing consumers’ ability to repay Property Assessed Clean Energy (“PACE”) financing; and
  • The Dodd-Frank Act’s directive that the CFPB, prior to any public disclosure, modify or require modification of loan-level data submitted by financial institutions under the Home Mortgage Disclosure Act (“HMDA”) so as to protect consumer privacy interests.

Continuation of Other Rulemakings.  In addition, the CFPB notes that it “is continuing certain other rulemakings described in its Spring 2018 Agenda.”  Those continuing rulemaking efforts include:

  • Anticipated rulemaking to reconsider the 2017 Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule; 
  • Anticipated rulemaking to reconsider its 2015 HMDA rule, for instance, by potentially revisiting such issues as the institutional and transactional coverage tests and the rule’s discretionary data points; and 
  • Anticipated rulemaking to address how to apply the 40-year-old Fair Debt Collection Practices Act (“FDCPA”) to modern collection practices.

Further Planning.  The CFPB also notes that it “has a number of workstreams underway that could affect planning and prioritization of rulemaking activity, as well as the way in which it conducts rulemakings and related processes.”  Those workstreams include:

  • Ongoing efforts to reexamine rules that the Bureau issued to implement Dodd-Frank Act requirements concerning international remittance transfers, the assessment of consumers’ ability to repay mortgage loans, and mortgage servicing;
  • Ongoing efforts to reexamine rules implementing a Dodd-Frank Act mandate to consolidate various mortgage origination disclosures under the Truth in Lending Act and Real Estate Settlement Procedures Act;
  • Ongoing efforts to reexamine the requirements of the Equal Credit Opportunity Act (“ECOA”) concerning the disparate impact doctrine, in light of recent Supreme Court case law and Congressional disapproval of a prior Bureau bulletin concerning indirect auto lender compliance with ECOA and its implementing regulations; and
  • Ongoing efforts directed at determining whether rulemaking or other activities may be helpful to further clarify the meaning of “abusiveness” under section 1031 of the Dodd-Frank Act.

On July 4, 2017, W. Va. Code § 46A-5-108 went into effect, requiring West Virginia consumers to send a written “Notice of Right to Cure” to a creditor or debt collector prior to instituting any action under Articles 2, 3, or 4 of the West Virginia Consumer Credit and Protection Act (the WVCCPA).  The full text of the current statute can be accessed here. 

After receipt of the Notice of Right to Cure, creditors and debt collectors are provided 45 days to send a cure offer to the consumer.  If the consumer accepts the cure offer and the offer is performed, it is a complete bar to recovery if a consumer later files a cause of action for the alleged violation.  Likewise, if the court finds that a cure offer is timely delivered and above the judgment that a consumer receives, the consumer’s counsel is barred from collecting attorneys fees and costs incurred following delivery of the cure offer. 

Implementation of the pre-suit notice requirement has raised multiple questions for courts and creditors alike.  Although intended to add clarity and to enable creditors to address any potential errors or violations of the WVCCPA, the provision has created more questions than answers, and it remains to be seen if the intent to allow creditors and consumers to avoid costly and time-consuming litigation will be realized. 

First, the statute is silent on whether a consumer can first file suit and then send the Notice of Right to Cure, requiring the creditor to then send a cure offer in 20 days under the provisions set forth in subsection (a) of § 5-108.  It appears that the legislature only intended this provision to apply when the creditor has filed a suit and the consumer is the would-be defendant.  However, as § 5-108 currently reads, the lack of clarity in the statute has been seen as an invitation for the consumer to engage in such conduct. 

Second, the effect the statute will have on individual claims for potential class representatives is still unknown.  Can the consumer demand a settlement on behalf of a class prior to class certification?  What is the effect of a rejected cure offer to a class representative’s claim if he or she does not individually recover a judgment above the individual cure offer amount?  Are creditors and/or debt collectors required to address potential class claims in a cure offer?  Once a class is certified, does the creditor or debt collector have an opportunity to send a classwide cure offer to all potential class members?  To date, these questions remain unanswered. 

Third, internal compliance procedures for companies conducting business in West Virginia should be updated to ensure that consumer notices are being addressed by either their legal departments or by referring the potential claim to their outside counsel to address and make recommendations to evaluate and respond to § 5-108 correspondence from consumers. 

The Financial Services Litigation group at Troutman Sanders has handled hundreds of contested matters in West Virginia, including class action cases, and arbitrations through appeal to the Fourth Circuit.  We will continue to monitor the effects of § 5-108 in West Virginia federal and state courts to identify and advise on new compliance risks and strategies.

Currently, some courts allow borrowers to bring Fair Debt Collection Practices Act claims for non-judicial foreclosures while other courts do not, but that is about to change. On June 28, the Supreme Court agreed to hear the appeal of Dennis Obduskey, a Colorado borrower arguing that the FDCPA should apply to non-judicial foreclosures.  

In the Tenth Circuit’s decision, a borrower sued his mortgage servicer and McCarthy & Holthus LLP, the law firm hired to process the non-judicial foreclosure, for failing to comply with certain requirements of the FDCPA. Specifically, Obduskey alleged that the law firm failed to respond to his request for a validation of the debt. The Tenth Circuit held that Wells Fargo was not a debt collector under the FDCPA since it began servicing the loan before it went into default. That holding will stand and will not be heard by the Supreme Court.         

Significantly, the Tenth Circuit further held that the law firm was not a debt collector under the FDCPA because non-judicial foreclosure proceedings are not covered by the FDCPA. In doing so, the Tenth Circuit sided with the Ninth Circuit, holding that compliance with the FDCPA is not required during non-judicial foreclosure proceedings, contrary to the position of the Fourth, Fifth, and Sixth Circuits. This is the holding that the Supreme Court will consider.   

The Tenth Circuit explained that its reasoning was based on its interpretation of the FDCPA, but went further and explained that permitting FDCPA claims for non-judicial foreclosures creates a compliance dilemma for firms like the one in this case. For example, direct communications to a borrower represented by an attorney would be prohibited by the FDCPA but required by Colorado statute. Similarly, communications to third parties would be banned by the FDCPA but required by Colorado statute.  

While many states require judicial foreclosures, a majority of states permit non-judicial foreclosures. Non-judicial foreclosures may proceed pursuant to a power of sale clause in the loan agreement. The borrower is given due notice and the auction takes place, without court oversight. Given the large number of non-judicial foreclosures that take place nationally, this Supreme Court ruling will have a far-ranging effect. 

In conclusion, the Supreme Court’s holding in Obduskey will significantly change the law while creating consistency across the country as to whether the FDCPA applies to non-judicial foreclosures. FDCPA compliance includes ceasing communications with the borrower on request and providing debt validation letters to the borrower on request, among other things. Penalties for violations can include up to $1,000 in statutory damages per lawsuit, plus attorneys’ fees and costs.

In a case of first impression, the United States District Court for the Western District of Michigan held that direct-to-voicemail messages qualify as a “call” under the Telephone Consumer Protection Act.  The Court’s opinion thus subjects another modern technology to the requirements of express consent and other strictures of the TCPA.

Defendant debt collector Dyck-O’Neal, Inc. delivered 30 messages to plaintiff consumer Karen Saunders’ voicemail using VoApp’s “DirectDROP” voicemail service.  The service did what it was supposed to do by delivering the voicemail messages through the telephone service provider’s voicemail server without actually calling Saunders’ phone number.  Saunders sued under the TCPA, and Dyck-O’Neal filed for summary judgment on the grounds that “ringless voicemails” are not subject to the TCPA.

The Court began its analysis by drawing predictable parallels to traditional voicemails and text messages which are subject to the TCPA.  The Court quoted from the FCC’s infamous 2015 Order, stating that Congress intended to protect consumers from “unwanted robocalls as new technologies emerge” (emphasis added).  The Court examined the technology behind the ringless voicemails, which included the fact that the technology did not call a telephone number assigned to a cell phone account – the statutory prerequisite for applying the TCPA provision at issue.  Nevertheless, the Court gave credence to the calls’ “effect on Saunders” rather than the fact that no call was made to a cell phone number.  According to the Court, that effect was “the same whether the phone rang with a call before the voicemail is left, or whether the voicemail is left directly in her voicemail box.”  The Court reasoned that Dyck-O’Neal did nothing other than reach Saunders on her cell phone through a “back door,” and failure to regulate this “back door” through application of the TCPA would be an “absurd result.”

Many collection agencies and marketing companies have been successfully using the direct-to-voicemail messages, and many others have considered following suit.  The Court’s decision is part of the risk-benefit analysis but, in the age of a quickly-evolving TCPA jurisprudence, another court may reach a different result.  This decision, facially at odds with the statutory text, could turn out to be an outlier or could mark the beginning of a trend.  Troutman Sanders will continue to monitor this line of cases.