When Is A Residential Mortgage Loan Servicer A Debt Collector? Under Federal Collection Laws, It Depends On When The Loan Went Into Default.
I. SUMMARY
Federal debt collection laws not only regulate the collection conduct of traditional collection agencies but attorneys and, in some circumstances, loan servicers. In the name of thin-profit margins, the current mortgage foreclosure crisis has pushed many loan servicers and bank attorneys to limits of these consumer protection laws. Those found to have violated debt collection laws may be liable to the borrower for $1,000.00 in statutory damages as well as actual damages including attorneys’ fees and costs.
The Law Offices of Robert J. Nahoum, P.C, practices in the area of consumer protection and stopping debt collectors. Contact us today to see if you have a case against a loan servicer or the bank’s attorneys (845) 450-2906; www.nahoumlaw.com.
II. The Problem
In recent years, due in part to the financial crisis and high rates of unemployment caused by Wall Street shenanigans, the United States has been in a foreclosure crisis. A congressional oversight panel has recently noted that one in eight U.S. mortgages is currently in foreclosure or default.[1] Unfortunately, the mischief did not end at the loan origination and securitization stage. As has been widely reported of late, the manipulation of the mortgage process has persisted all the way through to the final foreclosure stage. Loan servicers, their customer service representatives, loan modification agents, foreclosure lawyers and their staff have all been accused of heavy handed abusive and misleading debt collection tactics.
What recourse do victimized borrowers have under federal law? The answer to that requires an analysis of the federal Fair Debt Collection Practices Act[2] ("FDCPA" or the “Act”).
III. FDCPA Background
The FDCPA is a federal law, first enacted in 1977 as an amendment to the Consumer Credit Protection Act, to curtail abusive debt collection practices.[3] When enacting the FDCPA, Congress recognized the "universal agreement among scholars, law enforcement officials, and even debt collectors that the number of persons who willfully refuse to pay just debts is minuscule... [T]he vast majority of consumers who obtain credit fully intend to repay their debts. When default occurs, it is nearly always due to an unforeseen event such as unemployment, over extension, serious illness, or marital difficulties or divorce."[4] These finding may be particularly true when the debt sought to be collected is based on a residential home loan.
The Act regulates the conduct of "debt collectors" in collecting "debts" owed or allegedly owed by "consumers." It is designed to protect consumers from unscrupulous debt collectors, whether or not there is a valid debt. The FDCPA broadly prohibits unfair or unconscionable collection methods; conduct the natural consequence of which is to harasses, oppresses or abuses any debtor; and any false, deceptive or misleading statements, in connection with the collection of a debt; it also requires debt collectors to give debtors certain information with regard to their rights as a consumer.[5]
While Federal and state courts have concurrent jurisdiction of FDCPA cases they are most often brought in the Federal Courts.[6] Often, cases are class actions.[7] A single violation is sufficient to support judgment for the consumer.[8] A successful consumer is entitled to an award of actual damages, statutory damages up to $1,000, costs and attorney's fees.[9]
"Debt" is defined as "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment."[10] Residential mortgage loans are, when in default, covered by this definition.[11]
IV. Loan Servicer Exception
Liability under the FDCPA for mortgage servicers initially turns on whether or not the entity attempting to collect the debt is a “debt collector” as defined by the Act. The answer to this inquiry depends on when the mortgage servicer acquires the loan as the Act includes an exemption to the new servicer.
The FDCPA includes a rather lengthy list of all those who are not “debt collectors”.[12] The Act specifically states that the term does not include a “debt which was originated by such person; [or] concerns a debt which was not in default at the time it was obtained by such person”.[13]
Because the FDCPA does not apply to a creditor collecting its own debt, to understand the extent of this exclusion, the above language must be read together with the Act’s definition of “creditor” found in 15 U.S.C. §1692(a)(4). A “creditor” is
“any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for this paragraph, the term includes any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts. . . . The term does not include– (A) any officer or employee of a creditor while, in the name of the creditor, collecting debts for such creditor; . . . [and] (F) any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity . . . (ii) concerns a debt which was originated by such person; (iii) concerns a debt which was not in default at the time it was obtained by such person . . . .”
Read together and as confirmed in the Act’s legislative history, Congress’ intent is clear, the exemption is intended to include “mortgage service companies and others who service outstanding debts for others, so long as the debts were not in default when taken for servicing.”[14] This scenario is often the case when an assignment is made from one servicer to another.
Thus, for FDCPA purposes, the distinction between a “loan servicer” and a “debt collector” depends on whether the loan was in “default” at the time it was obtained. The term “default” raises a number of issues.
The Federal Trade Commission (“FTC”) (which is charged under the Act with regulatory enforcement and oversight) made clear in its often cited DeMayo opinion that the word “default” was to be defined by examining first, the underlying contract; followed by the applicable state or federal law; and finally the creditor’s reasonable written guidelines.[15] The standard residential loan note for Fannie Mae and Freddie Mac (who together hold or guarantee over $5.4 trillion of mortgages, about half of the nation's home loans) defines a loan as being in default if not paid on the due date (i.e., first of the month).
Under this dynamic, when determining a borrower’s rights under the FDCPA, it should first be determined when the loan came into to default and when the assignment to the loan servicer was made. In the current environment of loan securitization, this is often a complicated task - sometimes without out any clear answer. However, a trip to the county clerk to examine the chain of title may help to clarify.
If the borrower is already in foreclosure, this analysis is even more vital. It is often the case that assignments are made from one servicer to another weeks and even days before the foreclosure is filed. The banks are taking this course to ensure proper standing to bring the foreclosure case in the first place. However, in the process may well have opened themselves up to FDCPA liability.
V. The Foreclosure Mills
While the loan servicer may not be subject to FDCPA liability, their attorneys are. Originally excluded from the definition of "debt collector", in 1986, Congress removed the attorney exemption.[16] The legislative history of the amendment concludes that attorneys were suffering from the same infirmities as their collection agencies colleagues. Their collection activities were not being effectively monitored and so the removal of the exemption was necessary to "put a stop to the abusive and harassing tactics of attorney debt collectors."[17]
In its seminal case of Heintz v. Jenkins, the United States Supreme Court held that litigation conduct of attorneys in collecting consumer debts is not exempt from the FDCPA.[18] Foreclosure attorneys are generally subject to the FDCPA to the extent they attempt to collect money or enforce personal liability.[19]
However, in non-judicial jurisdictions where foreclosures are performed out of court by trustees for the bank, FDCPA liability has been elusive. The non-judicial jurisdiction circuits are split on this issue, some holding that the trustees are debt collectors and others holding that they are not. Distinctions are often made based upon the activities of the trustee. Is the trustee simply enforcing a security interest or collecting a debt?
With the hyper-activity in the foreclosure firms this is an area likely to continue to develop. This is particularly true in light of the recent revelations of the robo-signing scandals, MERS improprieties and the sheer volume the foreclosure mills are doing. With thin-profit margins, these firms are encouraged to get these foreclosures processed with little scrutiny or meaningful review of the servicers’ files. For this reason, borrower’s counsel should constantly be on the lookout for FDCPA liability on behalf of servicers and their counsel.
VI. Conclusion
Given the dramatic increase in foreclosure filings, great opportunities for FDCPA claims can be found. Putting loan servicers and their attorneys on the receiving end of a federal FDCPA complaint might be just the medicine the banking industry needs to get its act together and start treating borrowers with the dignity and respect they deserve.
The Law Offices of Robert J. Nahoum, P.C, practices in the area of consumer protection and stopping debt collectors. Contact us today to see if you have a case against a loan servicer or the bank’s attorneys (845) 450-2906; www.nahoumlaw.com.
[1] Congressional Oversight Panel, report at 3. Available at http://cop.senate.gov/reports/library/report- 100909-cop.cfm.
[2] 15 U.S.C. §1692 et seq.
[3] Consumer Credit Protection Act, Sen.Rep. No. 95-382, 95th Cong., 1st Sess. 1-2, reprinted in [1977] U.S. Code Cong. & Admin. News, pp. 1695, 1696.
[4] S. Rep. No. 382, 95th Cong., 1st Sess., p. 3 (1977), reprinted in 1977 U.S.C.C.A.N. 1695, 1697.
[5] 15 U.S.C. §§1692d, 1692e, 1692f and 1692g.
[6] 15 U.S.C. §1692k(d)
[7] 15 U.S.C. §1692k(a)(2)(B).
[8] Cacace v. Lucas, 775 F.Supp. 502, 505 (D.Conn. 1990); Supan v. Medical Bureau of Economics, Inc., 785 F.Supp. 304, 305 (D.Conn. 1991).
[9] 15 U.S.C. §1692k(a).
[10] 15 U.S.C. §1692a(5)
[11] Games v.Cavazos, 737 F.Supp. 1368, 1384 (D.Del. 1990).
[12] 15 USC 1692a(6).
[13] 15 USC 1692a(6)(f)(ii) and (iii).
[14] Perry v. Stewart Title Co., 756 F.2d 1197, 1208 (5th Cir. 1985), citing S. Rep. No. 95-382, 95th Cong., 1st Sess. 3, reprinted in 1977 USCCAN 1695, 1698.
[15] http://www.ftc.gov/os/statutes/fdcpa/letters/demayo.htm
[16] See P.L. 99-361, 100 Stat. 768, deleting former 15 U.S.C. §1692a(6)(F)
[17] 1986 USCCAN 1756-57.
[18] Heintz v. Jenkins, 514 U.S. 291 (1995)
[19] Kaltenbach v. Richards, 464 F.3d 524 (5th Cir. 2006); Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 378 (4th Cir. 2006) (definition of "debt collector" does not exclude those who enforce security interests but who also fall under general definition of "debt collector"); Overton v. Foutty & Foutty, LLP, 1:07-cv-0274-DFHTAB, 2007 U.S. Dist. LEXIS 61705 (S.D. Ind. Aug. 21, 2007).
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