Fifth Circuit: Mortgage Servicing Rules Apply to Servicers Only

In a case of first impression, the Fifth Circuit has held that the CFPB’s Mortgage Servicing Rules only apply to servicers and do not impute liability to the lender.  In Christiana Trust v. Riddle, the consumer alleged that the prior and current servicers of her mortgage violated the Mortgage Servicing Rules by failing to evaluate her loss mitigation application as required by 12 C.F.R. 1024.41(c)(1).  Riddle contended that the original lender, Bank of America, was vicariously liable for its servicer’s violation.  The Fifth Circuit affirmed the dismissal of the claims against Bank of America in part because it held that “Bank of America, as a matter of law, is not vicariously liable for the alleged RESPA violations of its servicers.”  Christiana Trust v. Riddle, 2018 U.S. App. LEXIS 36217, *7 (5^th Cir. Dec. 21, 2018).

In reaching its conclusion, the Fifth Circuit looked at the express language of both the Mortgage Servicing Rules and the source statute, RESPA.  The Court noted that the regulation only imposes duties on servicers.  See 12 C.F.R. 1024.41(c)(1) (if a servicer receives a complete loss mitigation application… a servicer shall…”) (emphasis added).  Likewise, a servicer’s obligation to comply with the Mortgage Servicing Rules derives from RESPA which provides that only “a servicer of a federally related mortgage shall not… fail to comply with another obligation found by the Bureau of Consumer Financial Protection, by regulation, to be appropriate to carry out the consumer protection purposes of this chapter.”  12 U.S.C. §2605(k)(1)(E) (emphasis added).  The Court was further persuaded by the fact that 12 U.S.C. §2605 imposes liability on “whoever fails to comply with this section” rather than a more broad class of interested parties.  The Court concluded that “[b]ecause only ‘servicers’ can ‘fail to comply’ with 12 U.S.C. §2605(k)(1)(E), only servicers can be “liable to the borrower’ for those failures.”  Id. at *8.

The opinion is a good news for lenders as there is now some precedent that lenders cannot be held vicariously liable for their servicers’ violations of the Mortgage Servicing Rules.  At least in the Fifth Circuit, lenders are provided with some insulation from liability.

District Court Holds Revocation of Consent Ineffective in the Face of Contractual Consent

Relying upon basic principles of contract law, an Alabama district court has held that there are limitations to revocation of prior express consent.  In Few v. Receivables Performance Management, 2018 U.S. Dist. LEXIS 134324 (N.D. Ala. Aug. 9, 2018), the consumer sought damages for alleged violations of the Telephone Consumer Protection Act (the “TCPA”).  In her complaint, Few alleged that the collection agency violated the TCPA by contacting her at least 184 times using an automated telephone dialing system after she revoked her consent.

In the underlying contract between Few and the creditor, however, Few provided a telephone number where she could be reached and provided the creditor, and/or any debt collection agency  hired by the creditor, with consent to contact her at that number to recover any unpaid portion of her obligation to the creditor.  Moreover, Few consented to receiving communications through an automated telephone dialing system or prerecorded messaging system.  When the collection agency contacted Ms. Few to collect upon the account, Ms. Few attempted to revoke her consent by informing them she no longer wished to receive calls. When the collection agency continued to call, Ms. Few filed suit and alleged that she had revoked her consent.

On the collection agency’s motion for summary judgment, the issue before the court was whether Ms. Few effectively revoked her prior express consent.  The collection agency maintained that she could not unilaterally revoke her consent because the contract term that provided consent was bargained for consideration.  In reviewing the issue, the court relied upon common law concepts of consent and black letter contract law.  The court first noted that common law concepts of consent only allow unilateral revocation where there is no contractual restriction to the contrary.  The court then noted that black letter contract law provides that one party may not alter a bilateral contract by revoking a term without the consent of the other party. The court therefore concluded that because “Ms. Few gave prior express consent to Receivables to make the calls, and, because she offered that consent as part of a bargained-for exchange and not merely gratuitously, she was unable to unilaterally revoke that consent.” Few at *6.

The decision follows other recent court opinions which appear to be aligning with a narrower view of revocation of consent and provides a couple of points to consider.  See also Reyes v. Lincoln Automotive Fin. Servs., 861 F.3d 51 (2^nd Cir. 2017).

• Does the inclusion of prior express consent within the terms of the contract erode or eviscerate the consumer’s ability to revoke consent?  This opinion, as well as Reyes, seem to suggest that possibility.
• How specific does prior express consent need to be?  Probably the more specific the better.  In this case, the consumer provided:
  • prior express consent to be contacted at a specific number;
  • to specific persons – the creditor and any debt collection agency;
  • for a specific purpose including the collection of an unpaid balance; and
  • by specific means – an automated telephone dialer or automated messaging.

While the decision is a bright spot for the industry, collection agencies should continue to use caution and closely examine underlying contract documents for prior express consent before employing automated dialing system technology when calling consumers.

Statement that Debt Collector Would Call Overshadows 1692g Notice

A recent case from a Wisconsin district court serves as a reminder that the best approach to a 1692g notice is that it stands alone.  In Maniaci v. The Receivable Management Services Corp., 2018 U.S. Dist. LEXIS 109087 (E.D. Wisc. June 29, 2018), the agency’s 1692g notice included a statement that

If you have not yet been contacted by an RMS representative, you will be receiving a call to bring this matter to a resolution.  Should you receive this letter after a discussion with our representative, we thank you for your cooperation.

Maniaci at *2. 

In determining the collection agency’s motion to dismiss, the court considered whether the above statement overshadowed the 1692g notice, leading the unsophisticated consumer to believe he could wait until he received a call to dispute the debt. 

The agency contended that the statement did not overshadow the remainder of the notice because it “clearly and unequivocally directs the consumer to provide the dispute in writing.”  Id. at * 5.  The court, however, disagreed.  In doing so, the court made two points.  First, the court concluded that a statement that the debt collector would be calling might lead the unsophisticated consumer to conclude that he would be receiving the call within the thirty-day debt validation window, at which time he could “bring this matter to a resolution” by disputing the debt.  Second, the court found the debt collector’s contention that it did not make calls within the thirty-day validation troubling because it presented the possibility that consumers would forfeit their rights under §1692g. 

Despite denying the motion to dismiss, however, the court was quick to point out that the threshold for motions to dismiss is high because “dismissal is only appropriate in cases involving statements that plainly, on their face, are not misleading or deceptive.”

The key take away from this, of course, is that 1692g notices are best when they contain no extraneous language which might obscure the notice.

Aftershocks Being Felt: The TCPA After ACA International v. FCC

The aftershocks from the D.C. Circuit’s opinion in ACA International v. FCC are beginning to be felt.  In ACA International, the D.C. Circuit set aside several elements of the FCC’s 2015 Declaratory Ruling.  A recent opinion by the Third Circuit demonstrates some of the repercussions of that decision.

In Dominguez v. Yahoo, Inc., 2018 U.S. App. LEXIS 17436 (3^rd Cir. June 26, 2018), the Third Circuit affirmed a judgment in favor of Yahoo despite the fact that the consumer received 27,800 unwanted text messages.  In Dominguez, the consumer purchased a cell phone with a reassigned number.  The prior owner of the number had a subscription with Yahoo’s Email SMS Service which sent a text every time the prior owner received an email.  Because the prior owner of the number never cancelled the subscription, Mr. Dominguez became the recipient of 27,800 unwanted text messages.  Mr.  Dominguez filed a putative class action against Yahoo asserting violations of the TCPA.  The problem?  The district court concluded that the Email SMS Service did not qualify as an automated telephone dialing system (“ATDS”) because it did not have the capacity to store or produce telephone numbers using a random or sequential number generator.  On remand from a prior appeal, the consumer amended his complaint to take advantage of the FCC’s 2015 Declaratory Ruling and alleged that the Email SMS Service had the “latent or potential capacity” to store or produce telephone numbers using a random or sequential number generator.  The trial court again concluded that the Email SMS Service did not qualify as an ATDS.

On appeal, the Third Circuit relied upon the D.C. Circuit’s holding in ACA International to support its conclusion that the statutory definition of an ATDS requires the present capacity to function as an autodialer. In doing so, the court relied upon two key findings: first, that the Email SMS Service only sent messages to numbers that had been individually and manually inputted into its system by a user; and secondly, that the messages were sent because the previous owner of the message affirmatively opted to receive them and not because of a random number generation.  Dominguez, *9. 

The opinion is a positive for the ARM industry because it demonstrates the potential impact of the D.C. Circuit’s decision and will likely to be followed by others that will more narrowly define the meaning of an ATDS.

Deeming the Tracking of a Debtor’s Every Move “Impractical,” District Court Finds a Bona Fide Error and Dismisses FDCPA Action Against Law Firm

A district court has dismissed an FDCPA action based on a bona fide error after reviewing the collection firm’s extensive pre-suit procedures and determining they were reasonably calculated to avoid any errors. Guynn v. Blatt, Hasenmiller, Liebsker & Moore, LLC, 2018 U.S. Dist. LEXIS 43032 (S.D. Ind. March 14, 2018).   

In 2006, Mr. Guynn, opened a personal credit card with Bank of America. A few years later, he purchased a home in Indianapolis, Marion County, Indiana, and lived there full time until he was transferred by his employer to a job in Edwardsville, Illinois in 2014. Due to the transfer, Guynn moved out of the property, but continued to own it, and arranged for his mail to be delivered to a P.O. Box in Marion County, Indiana.

Guynn defaulted on his Bank of America credit card in 2013, and in 2016 the account was referred to a law firm for collection. Two initial notices were sent to Mr. Guynn (one by defendant's predecessor in interest and one by defendant) and after receiving no response, defendant filed a collection suit in Marion County, Indiana.  In response to the debt collection action, Guynn filed this suit, alleging the law firm violated of § 1692i of the FDCPA because the suit was filed in Indiana rather than in Illinois where he was currently residing for his job. As an affirmative defense, the law firm asserted bona fide error. 

 

Policies and Procedures Implemented to Insure Compliance with the FDCPA

In support of its bona fide error defense, the law firm submitted its policies and procedures regarding its pre-suit procedures. 

Initial Demand 

After receiving an electronic download of the account, the law firm employed a “multi-step process to ensure compliance with” the FDCPA, including;

·     Utilizing an electronic interface to receive new case information and to store it directly onto its database, eliminating the possibility of clerical mistakes;

·     Sending the information to its Data Operations Department, which was responsible for drafting initial written notice letters; and

·     Requiring its attorneys to:

o   review and compare the information in the initial written notice with the information in the electronic download,

o      review the account’s scrub history,

o      review the account for disputes,

o      confirm the consumer was not represented by counsel, and

o      verify the listed address against the information in the firm’s system.

Pre-Suit Review

Prior to filing suit, the law firm employed a checklist to ensure that all FDCPA requirements had been met. Specifically, the law firm:

·     Verified that the PO Box was the consumer’s address of record,

·     Reviewed the County assessor’s website and property records to verify the consumer owned the Indiana real estate,

·     Verified the Indiana property was listed on Guynn’s Bank of America statements and most recent Change of Terms, and

·   Verified that through the US Postal Service that the PO Box still belonged to the consumer.

The Court’s Decision

Without reaching the question of where Guynn “resided”, the court found that any failure by the law firm to file the collection action in the proper venue was a result of a § 1692k(c) bona fide error.

In so finding, the court keyed in on a number of facts, including:

      

·    The law firm never received any information indicating that Guynn moved outside of Marion County;

·       Neither of the two letters sent to the P.O. Box were returned as undeliverable;

·     The law firm’s pre-suit investigation confirmed that Guynn still owned the Indiana Property; and

·        The law firm’s investigation also confirmed that the PO Box was registered to Guynn.

Moreover, the court noted, the law firm “could not find any connection between Guynn and Edwardsville, Illinois during the relevant times even after filing the Debt Action,” and as such, the court found any violation of § 1692i to be a “genuine, unintentional mistake.”

Guynn argued that the law firm failed to employ sufficient procedures to ensure that the collection action was filed in the correct venue, suggesting the law firm could have called him, sent a letter to the P.O. Box requesting his current address, or hired a private process server to confirm his residence. The court turned away these suggestions, noting that the FDCPA “does not require debt collectors to take every conceivable precaution to avoid errors,” but rather only requires “reasonable” procedures. “In fact,” the court surmised, “given the current economic climate in which businesses often demand greater fluidity from their employees in terms of travel and temporary relocation, it would be impractical to require debt collectors to track each debtor’s locations in order and to know where debtors, like Guynn, may be temporarily living at any given time.”  Id. at *16-17. Instead, the court found that the law firm took reasonable steps prior to filing suit to ensure compliance with §1692i, specifically noting the following:

(1) reviewing all of the information it received from Bank of America regarding Guynn's credit card account, including Guynn's address of record, billing statements, and most recent Notice of Change in Account Terms documentation; (2) utilizing RevSpring (a third party letter vendor) and the NCOA database to determine Guynn's proper address; and (3) researching Guynn's current property ownership information through the Marion County Assessor's website and the Indiana Property Record Cards.

Id.  

Application of Guynn

Guynn is a thorough and well-reasoned opinion regarding bona fide errors in collection lawsuits. The opinion also recognizes the difficulty – and impracticality – of tracking a transient debtor’s every move before filing a collection lawsuit. We recommend that collection firms look to Guynn as a representative example of the kind of policies and procedures that will pass FDCPA bona fide error defense muster.  

District Court Holds that the Verbiage, “Settlement Offers May Have Tax Consequences”, in a Debt Collector’s Form Collection Letter was not in Violation of the FDCPA

By: Hannah D. Choe

 

The Western District Court in New York has held that a debt collector did not violate § 1692e(10) of the FDCPA.  The Court held that a form collection letter with offers of settlement did not “use… false representation or deceptive means to collect or attempt to collect [a] debt” when the form letter contained language which stated, “[t]hese settlement offers may have tax consequences” following Defendant’s three offers to settle Plaintiff’s debt for less than the full amount that was due and owing.  

 

Specifically, Plaintiff (the consumer) found issue with the following language in Defendant’s (the debt collection agency) form collection letter:

 

“These settlement offers may have tax consequences. We recommend that you consult independent tax counsel of your own choosing if you desire advice about any tax consequences which may result from this settlement. FRS is not a law firm and will not initiate any legal proceedings or provide you with legal advice. The offers of settlement in this letter are merely offers to resolve your account for less than the balance due”. 

 

Plaintiff alleged that the language regarding tax consequences was a false representation and/or deceptive because the statement “these settlement offers may have tax consequences” could be interpreted to mean that the mere extension of the offers, whether or not these offers were actually accepted by the consumer, may possibly create tax consequences to the consumer.

 

A number of district courts have previously dealt with nearly identical language to this current case. Other district courts determined that the statement “this settlement may have tax consequences” did not violate § 1692e. However, the difference between this statement and the language in the Rozzi case is that Defendant included the word “offer”. Plaintiff argues that “these settlement offers may have tax consequences” is a false statement because unaccepted settlement offers cannot possibly cause a consumer to incur tax consequences.

 

In order to determine whether Defendant violated the FDCPA, the Court applied the “least sophisticated consumer” standard. This standard looks through the lens of the least sophisticated consumer in its assessment of how a consumer would understand the communication. Avila v. Riexinger & Assocs., 817 F.3d 72, 75 (2d Cir. 2016). A collection letter “can be deceptive if [it is] open to more than one reasonable interpretation, at least one of which is inaccurate.” E.g., Easterling v. Collecto, Inc., 692 F.3d 229, 233 (2d Cir. 2012) (quoting Clomon v. Jackson, 988 F.2d 1314, 1319 (2d Cir. 1993)).  

 

With that said, the Court stated that while the “least sophisticated consumer… lacks the sophistication of the average consumer and may be naïve about the law,” the consumer would still be “rational, and possess[] a rudimentary amount of information about the world.” Arias v. Gutman, Mintz, Baker & Sonnenfeldt LLP, 875 F.3d 128, 135 (2d Cir. 2017). Additionally, the least sophisticated consumer is “willing[] to read a collection notice with some care.” Greco v. Trauner, Cohen & Thomas, L.L.P., 412 F.3d 360, 363 (2d Cir. 2005). This distinction is important because it helps protect the naïve consumer while preserving the concept of what is reasonable and thereby not subjecting debt collectors to arbitrary results on the grounds of bizarre or idiosyncratic interpretations of their collection notices.

 

The Court pointed out that immediately after the statement “[t]hese settlement offers may have tax consequences”, it is followed by, “[w]e recommend that you consult independent tax counsel of your own choosing if you desire advice about any tax consequences which may result from this settlement.” While it is arguable that based on technicality, it is an inaccurate statement to say that settlement offers may have tax consequences, it is clear that the author of the letter intended to convey that tax consequences may result from an accepted offer, thus an agreed upon settlement. As such, the Court chalked up Defendant’s collection notice to a sloppy and poorly written notice and that even the least sophisticated consumer would have read the entirety of the paragraph and understood that tax consequences would only attach once the offer has been accepted. Therefore, the Court found that although this one sentence was arguably inaccurate, Defendant did not violate the FDCPA when the letter was read in its entirety.

 

Implications of Rozzi 

The Rozzi Court’s holding that the inclusion of the term “offers” did not amount to a false representation or deceptive practice to collect a debt means that the Court will look at the language in a collection letter in its entirety to determine the reasonable interpretation of the least sophisticated consumer.  Although the hyper-technical reading of one sentence of an entire form letter may be inaccurate, the Court did not stretch to permit Plaintiff’s interpretation.  The collection letter read in its totality did convey that the tax consequences would only attach once an offer was accepted. Therefore, Plaintiff’s interpretation was unreasonable even based on the least sophisticated consumer standard. Therefore, as a matter of law, Defendant’s form letter did not violate § 1692e(10) of the FDCPA.

 

 

Hannah D. Choe is an attorney practicing in Smith Debnam's Creditors’ Rights and Collections Practice Group