Fifth Circuit Affirms Debt Collector’s Duty to Report Disputed Debt

A recent opinion from the Fifth Circuit should serve as a reminder to debt collectors that their duties as to disputed debts are not governed solely by section 1692g.  In Sayles v. Advanced Recovery Systems, Advanced Recovery Systems (“ARS”) sent debt validation notices pursuant to section 1692g to the plaintiff regarding two debts.  The notices were sent to the plaintiff’s last known address in June and September of 2013.  Sayles v. Advanced Recovery Sys., 2017 U.S. App. LEXIS 12080, *1 (5^th Cir. July 6, 2017). The plaintiff never responded to the notices with a dispute or request for validation and in fact, alleges he did not recall receiving the validation notices.  In February 2014, however, the plaintiff discovered ARS was reporting the debts on his credit report.  In response, plaintiff faxed a letter to ARS on March 5, 2014 disputing the debts and requesting validation.  In April 2014, plaintiff ran his credit report again and discovered ARS was still reporting the debts and had failed to mark the debts as “disputed.”  The plaintiff filed suit against ARS, contending that ARS violated 15 U.S.C. §1692e(8) which provides that a debt collector may not  communicate or threaten to communicate any “credit information which is known or which should be known to be false, including the failure to communicate a disputed debt is disputed.”  15 U.S.C. §1692e(8).

The primary issue before the district court was whether a debt collector may rely upon a consumer’s failure to seek validation within the thirty day validation period as a defense for the debt collector’s failure to report a subsequent dispute as to the debt to the credit reporting agencies. The district court held that it could not.  In doing so, the court stated that the protections provided by section 1692e(8) were separate and apart from those provided by section 1692g.  While ARS was not under an affirmative duty to correct its reporting prior to its receipt of the plaintiff’s fax, once it received the fax, it was under an affirmative duty to communicate in its future reporting that the debt was disputed.  Sayles v. Advanced Recovery Sys., 206 F. Supp. 3d 1210,  1216 (S.D. Miss. 2016).

On appeal, the Fifth Circuit agreed with the district court.  In doing so, the Fifth Circuit focused on the specific language of section 1692e(8) and,  particularly, the “knows or should know” language.  “This “knows or should know” standard requires no notification by the consumer, written or oral, and instead, depends solely on the debt collector’s knowledge that a debt is disputed, regarding less of how or when that knowledge is acquired.  Applying the meaning of “disputed debt” as used in {1692g(b)] to [1692e(8)] would thus render the provision’s “knows or should know” language impermissibly superfluous.” .  Sayles v. Advanced Recovery Sys., 2017 U.S. App. LEXIS 12080 at *5-6 (internal citations omitted).

Mortgage Servicer’s Transfer Notice Violates FDCPA

Mortgage servicers need to carefully review their Transfer Notices when the debt is in default at the time of transfer.  In an unpublished decision, the Eastern District of New York recently held that a “Notice of Servicing Transfer” violated 15 U.S.C. §1692e(10).  In Baptiste v. Carrington Mortgage Services, LLLC, 2017 U.S. Dist. LEXIS 103609 (E.D.N.Y. July 5, 2017), Carrington sent a “Notice of Servicing transfer” to the plaintiff alerting him that his mortgage servicing was being transferred to Carrington.  The letter went on to advise the plaintiff that “going forward, all mortgage payments should be sent to Carrington, but that ‘[n]othing else about [the] mortgage loan will change.”  Baptiste at *2.  The letter additionally included an FDCPA notice that stated that “[t]his notice is to remind you that you owe a debt.  As of the date of this Notice, the amount of debt you owe is $412,078.34.”  Id..  The attached FDCPA notice also noted that “[Carrington} is deemed to be a debt collector attempting to collect a debt and any information obtained will be used for that purpose.” Id. at *3.  At the time of the servicing transfer, the mortgage was in default.  The plaintiff contended the letter violated 15 U.S.C. §1692e(10) by failing to disclose that the balance on his debt was increasing due to interest.  Carrington moved to dismiss.

In denying Carrington’s motion to dismiss, the court relied upon the Second Circuit’s recent decision in Avila v. Riexinger & Associates, LLC, 817 F.3d 72 (2nd Cir. 2016).  In Avila, the Second Circuit held “that the FDCPA requires debt collectors, when they notify consumers of their account balance, to disclose that the balance may increase due to interest and fees.” Avila, 817 F.3d at 76. 

In support of its motion to dismiss, Carrington argued that Avila was not applicable because the Transfer Notice was not a collection attempt and therefore not subject to section 1692e.  The court, however, rejected that argument relying on another Second Circuit decision, Hart v. FCI Lender Servs., Inc., 797 F.3d 219 (2nd Cir. 2015).  In doing so, the court considered the following factors when reviewing the notice: (a) the Notice’s reference to the debt and direction that payments be sent to Carrington; (b) the reference to the FDCPA and inclusion of the section 1692g notice; and (c) the inclusion of a statement that the Notice is an attempt to collect a debt.  These factors, according to the court, indicated that the Notice of Transfer was sent in connection with the collection of a debt.

Mortgage servicers need to pay careful attention to each and every communication with consumers beginning with their Notice of Transfer. While mortgage servicers are not covered by the FDCPA when servicing current accounts, those mortgage servicers accepting transfers of defaulted portfolios or mixed portfolios should review each and every communication provided to a consumer to ensure its compliance with the FDCPA.