Fair Debt Collection Practices Act's "Debt Validity Notice Requirement

Everything's harder in New York, even collecting a debt.

In Hooks v. Forman, Holt, Eliades & Ravin, LLC, --- F.3d ---, 2013 WL 2321409 (May 29, 2013), the Second Circuit Court of Appeals ruled that letters stating that debtors could only dispute debts in writing and not orally violated the Fair Debt Collection Practices Act, 15 U.S.C. §§1592, et seq. ("Act") "debt validity notice provision".

 

Thus, unlike Third Circuit states like Pennsylvania and New Jersey, New York debtors may derail debt collection efforts with a phone call or voice mail arguing that they don't owe any money.

Because this Second Circuit holding contradicts the Third Circuit's "consumer debtor must send a written statement to contest debt's validity" requirement, until issue is resolved by the United States Supreme Court mayhem will ensue.

Act's "Disputing Validity of Debt" Notice Requirement

The Act regulates "debt collection activity" on "family, personal or household purposes" transactions and defines a “communication” as the “conveying of information regarding a debt directly or indirectly to any person through any medium.  15 U.S.C. §1692(a).

The Act requires a debt collector to send a written notice to any consumer debtor with whom it communicates in connection with the collection of a debt containing “a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector.” 15 U.S.C. §1692g(a)(3).

Although it fails to specify whether the consumer's disputation must be written, the Act provides that if the consumer “notifies the debt collector in writing” that the debt is disputed, the debt collector must “cease collection of the debt, or any disputed portion thereof" until the debt collector mails verification of the to the debt collector and, upon the consumer's "written request", provide the original creditor's name and address if different from the current creditor.  15 U.S.C. §1692g(a)(4)&(5).

Hooks v. Forman Opinion

After failing to make timeshare mortgage payments, the Hooks v. Forman consumers received a collection notice letter setting forth that unless "written notice" disputing the debt was received within 30 days, the debt collector would presume the debt was valid ("Notice"). 

The consumers sued the debt collectors in the United States District Court for the Southern District of New York alleging that because it required that a challenge to the debt's validity be made in writing, the Notice failed to comply with §1692g(a)(3) of the Act.  The District Court granted the debt collector's dismissal motion concluding that a notice requiring that disputes must be presented in writing does not violate §1692g(a)(3).

In vacating the district court’s complaint dismissal, the Second Circuit held that under the statute's “straightforward language”, the Act does not require a written dispute to avoid an assumption by the debt collector of the debt's validity.

The Second Circuit distinguished language in different portions of §1692g, some portions of which require written disputes or requests from debtors for various rights to apply, from that which deals with a debt's presumed validity holding that because “[t]he right to dispute a debt is the most fundamental” of those set forth in §1692g and “it was reasonable to ensure that it could be exercised by consumer debtors who may have some difficulty with making a timely written challenge”, requiring consumers to take extra step of putting a dispute in writing before claiming “the more burdensome set of rights” afforded by §1692g (like requiring all debt collection efforts to cease) made sense.

Circuit Split Requires Supreme Court "Debt Disputation" Clarification

While whether a "debt disputation" may be oral or must be in writing is an issue of first impression for the 2nd Circuit, two (2) other circuits have considered the issue reaching different conclusions.

In Graziano v. Harrison, 950 F.2d 107 (3d Cir. 1991), the Third Circuit concluded that a  consumer debtor must send a written statement to contest the debt's validity holding that "reading §1692(a)(3) not to impose a writing requirement would result in an incoherent. system in light of the explicit writing requirements in §§ 1692g(a)(4), 1692g(a)(5), and 1692g(b)".

Conversely, in Camacho v. Bridgeport Financial, Inc., 430 F.3d 1078 (9th Cir. 2005), the Ninth Circuit concluded that a consumer debtor need not send a writing to contest the debt under §1692g(a)(3) for reasons including that the Act's contrasting explicit writing requirements "showed that Congress did not intend to impose a writing requirement".

Schain Law Firm: 5 Year "Mortgage Foreclosure Judge" Anniversary

Five (5) years ago I was appointed as a Philadelphia Mortgage Foreclosure Court Judge Pro Tempore and the results have been astonishing.

 

Since 1998's "mortgage foreclosure meltdown", residential foreclosure cases have comprised 19% of Philadelphia's civil case inventory.

 

Philadelphia's conciliation program requires lenders to meet face-to-face with residential homeowners in every owner-occupied property subject to foreclosure before the foreclosure proceeds.

Each meeting is supervised by an experienced consumer lending attorney serving as a "Judge Pro Tempore" seeking to forge a permanent resolution ranging from workout alternatives including forbearance and modification agreements.

 

Each week between 150 to 300 cases appear before the foreclosure court and the results have been spectacularly impressive.

 

Over the past sixty (60) months, our nationally renowned diversion program has served 23,000 Philadelphia residents and saved over 5,000 homes from sheriff's sale.

 

In 2008, 95.3% of foreclosures were resolved in 7 to 13 months; in 2009, 53.7% were resolved in 7 to 13 months, in 2010, 88.6% were resolved in 7 to 13 months, and in 2011, 67% were resolved in 7 to 13 months.

Despite these impressive statistics and case backlog reduction, 6304 foreclosures are pending and the number of filings have not diminished.

 

Further, new issues keep emerging including foreclosures of seniors living alone whom die, are deemed mentally incompetent or face crippling financial trouble of which their families are unaware.

 

Philadelphia's Mortgage Foreclosure program has implemented an innovative dual-track process integrating the handling of both the foreclosure and estate situation to simplify and accelerate resolving the dispute.

Supreme Court Amends "Non Pros Judgment for Inactivity" Rules

In an Order dated April 5, 2013, Pennsylvania's Supreme Court amended Rule 3051 of the Pennsylvania Rules of Civil Procedure to allow a plaintiff to open a "judgment of non pros for inactivity" by showing that the defense failed to meet each of Jacobs v. Halloran, 551 Pa. 350, 710 A.2d 1098 (1998) three (3) requirements for the judgment's entry, including a showing of "actual prejudice".

A "non pros judgment for inactivity" occurs when a court dismisses case as a "consequence of long delay of prosecution" and "when a defendant's position or rights are so prejudiced by length of time and inexcusable delay, plus attendant facts and circumstances, that it would be an injustice to permit presently the assertion of a claim against him.”  Jacobs v. Halloran, 710 A.2d at 1102.

Formerly, Pennsylvania Rules of Civil Procedure 3051 required plaintiffs seeking non pros judgment relief to timely file a petition demonstrating "a reasonable explanation or legitimate excuse" for the inactivity and a meritorious cause of action.  Pa. R. Civ. P. 3051(b).

The new amendment adds a third subdivision to Rule 3051 - - Subdivision (c) - - stating that a plaintiff seeking to open a non pros judgment for inactivity must allege facts showing that the petition is timely filed, a meritorious cause of action and the record of the proceedings granting the non pros judgment does not support a finding that the following "non pros judgment's entry for inactivity" requirements have been satisfied: (i) there has been a lack of due diligence on the part of the plaintiff for failure to proceed with reasonable promptitude, (ii) the plaintiff has failed to show a compelling reason for the delay, and (iii) the delay has caused actual prejudice to the defendant.

Subdivision (c) does not apply to non pros judgments for failure to file a complaint after a writ of summons has been filed and the new subdivision only applies to cases in which, following a complaint's filing, an extended docket activity lull occurs.

Unlike Subdivisions (a) and (b) of Rule 3051, which imply that prejudice will be automatically deemed as resulting from a two (2) year prosecution delay, the rule change expressly requires a defendant to show actual prejudice to maintain a non pros judgment.

The newly adopted amendment also changes Rule 3051's subdivision (b)(2) (which had previously stated, "If the relief sought includes the opening of the judgment, the petition shall allege facts showing that ... (2) there is a reasonable explanation or legitimate excuse for the inactivity or delay") by adding the clause "except as provided in Subdivision (c)" and replacing "inactivity or delay" with "conduct that gave rise to the entry of judgment of non pros".

A reasonable reading of the rule's new language suggests that a plaintiff can open a non pros judgment for inactivity if they can show that the defendant was not prejudiced by the delay, even if the plaintiff does not have a compelling reason for the delay or showed insufficient due diligence in moving the proceedings along.

According to the Supreme Court's order, the change is scheduled to take effect May 5, 2013.

3rd Circuit Extends TILA Rescission Limitations Deadline

In its Sherzer v. Homestar Mortgage Services, 2013 WL 425835 (3d Cir. 2013) opinion, the Third Circuit Court of Appeals reversed its prior position and held that mailing a rescission demand letter - - and not filing a lawsuit - - satisfies the Truth in Lending Act, 15 U.S.C. §§1601 et seq.'s ("TILA") three (3) year limitations period.  

Specifically, TILA, which allows consumers to rescind residential mortgage loans following lender's failure to make required disclosures, sets forth that the "right of rescission" expires three (3) years after the loan is closed.  15 U.S.C. §1635(f). 

In Sherzer v. Homestar Mortgage Services, the Third Circuit reversed the district court’s dismissal of the action and rejected the lender’s argument that the lawsuit was not timely because it was not filed within three (3) years of the loan's closing holding that by mailing a rescission notice within the three (3) year period the borrowers had timely rescinded the loan. 

The Third Circuit found that the borrowers’ position was not foreclosed by the U.S. Supreme Court’s TILA interpretation in Beach v. Ocwen Federal Bank, 523 U.S. 410, 411–13, 118 S.Ct. 1408 (1998) which the Sherzer opinion interpreted as not addressing how a borrower must exercise his rescission right within such period to prevent its extinguishment. 

The Sherzer opinion also contradicts the Third Circuit’s 2011 unpublished Williams v. Wells Fargo Home Mortgage, Inc., 410 Fed. Appx. 495 (3d Cir. 2011) decision in which it deemed a borrower’s rescission claim "untimely" because, despite having sent a rescission notice within three (3) years of the closing, the borrower did not file her lawsuit within such period. 

Further, the Third Circuit rejected concerns that allowing borrowers to rescind soley by written notice could indefinitely cloud a lender’s title because uncertainty about the right to rescind could continue until either the borrower filed a rescission lawsuit or the lender brought a foreclosure or declaratory judgment action.  

Instead, despite acknowledging that its holding “could potentially impose additional costs on banks, as it costs little for an obligor to send a letter to the lender while, on the other hand, the lender would incur some cost to sue to determine title", the Third Circuit found  that “[o]nce alerted to the cloud on its title, a lender could sue to confirm that the obligor’s rescission was invalid or do nothing and assume the risk that a court might later rule that the rescission was valid.”  2013 WL 425835 at pg. 7-9. 

The Third Circuit joins the Eleventh and Fourth Circuits in holding that notice alone within the three (3) year period is sufficient to validly exercise a right to rescind whereas the Ninth, Tenth and First Circuits adopt the contrary view.  See Gilbert v. Residential Funding LLC, 678 F.3d 271, 277–78 (4th Cir. 2012); Williams v. Homestake Mortgage Co., 968 F.2d 1137, 1139–40 (11th Cir. 1992);  Rosenfield v. HSBC Bank, USA, 681 F.3d 1172, 1188 (10th Cir. 2012); Yamamoto v. Bank of N.Y., 329 F.3d 1167, 1172 (9th Cir. 2003); Large v. Conseco Fin. Servicing Corp., 292 F.3d 49, 54–55 (1st Cir. 2002). 

In light of this "circuit split" if a petition for certiorari is filed it is likely that the U.S. Supreme Court will agree to hear the case.

Third Party Communication Under Fair Debt Collection Practices Act

Two (2) recent opinions provide guidance on acceptable "third party communication" under the Fair Debt Collection Practices Act, 15 U.S.C. §§1592, et seq.  ("Act") barring collection letters addressed to a debtor's employer but easing restrictions on "dunning voicemails".

"Fair Debt Collection Practices Act" 3rd Party Communications Bar   

The Act regulates "debt collection activity" on "family, personal or household purposes" transactions.  15 U.S.C. §1692(a).

The Act defines a “communication” as the “conveying of information regarding a debt directly or indirectly to any person through any medium.”  Id.

The Act prohibits a debt collector, without debtor's consent, from communicating about collecting a debt with one other than a debtor and his attorney, consumer reporting agencies, a creditor and its attorney, or a debt collector's attorney.  15 U.S.C. §1692c(b).

Prohibition on Addressing Collection Letters to Debtor's Employers 

In Evon v. Law Offices of Sidney Mickell, 688 F.3d 1015 (9th Cir. 2012), the U.S. Court of Appeals for the Ninth Circuit ruled that sending a collection letter to debtor's employer's address addressed to debtor "in care of" employer without debtor's consent forms a per se violation of the Act's third-party communications bar.

The Evon plaintiff's employer had opened the letter addressed to her, the envelope for which listed defendant "law office" as the return address.

The Ninth Circuit ruled that the debt collector "knew or could reasonably anticipate" that a letter sent to a debtor's employer "might be opened and read by someone other than the debtor", because of the return address, someone handling plaintiff's mail would know that she "was receiving legal mail, a fact many people would prefer be kept private", and "disclosing a consumer's personal affairs to his or her employer is a form of collection abuse."  688 F.3d at 1019.

Non Specific Dunning Voice-Mail Permitted

In Zortman v. J.C. Christensen & Associates, Inc., No. 10-3086 (D. Minn. May 2, 2012), the Minnesota District Court held that a voicemail containing caller’s name and identifying him as a debt collector with “an important message” was not a prohibited “communication” under the Act.

The message, left on plaintiff’s cellular phone, included the debt collector’s phone number but did not identify a consumer or a debt and was heard by plaintiff's children to whom she had lent her phone.

Because the voicemail message was not directed to the plaintiff by name and did not identify a debt, the Zortman Court message ruled that it would not convey that the plaintiff was being called in connection with a debt and was unwilling to find “indirect communications” based on “inferences or assumptions by an unintended listener” that the plaintiff was the intended recipient or that the call, because it was from a debt collector, was necessarily to collect a debt.

The District Court also found that the “important message” language did not “convert [the debt collector’s] simple self-identification and telephone number into an indirect conveyance of information about a debt” and use of “important” conveyed no substantive information about the call’s purpose.

According to the Zortman Court, the Act as imposes no "third party communication" liability based on a voicemail message revealing no more than a hang-up call, a cellular phone’s “missed call” log, caller ID, or an Internet search for caller’s phone number.

Impact of Evon and Zortman Opinions

Beyond barring collection letters addressed to a debtor's employer and easing non specific "dunning voicemail" restrictions, the Evon and Zortman opinions provide guidance on acceptable "third party communications" under the Act.

First, the Evon Court based its ruling on the Federal Trade Commission's Act Staff Commentary providing that a debt collector cannot "send a written message that is easily accessible to third parties" or use an "in care of" letter unless the consumer "lives at, or accepts mail at, the other party's address." 

Thus, the lesson of Evon is that communications' easy access by a third party is a heavily weighed factor in deeming it a wrongful third party communication.

Second, the Zortman opinion eases the "collection voicemail restrictions" imposed by the Foti v. NCO Financial Systems, Inc., 424 F.Supp.2d 643 (2006) of requiring a debt collector to either hang up or leave an awkward, elaborately scripted message. 

Pursuant to Zortman, voice-mails that are not directed to the plaintiff by name nor identify a debt do not form a wrongful communications under the Act.

Supreme Court’s Freeman v. Quicken Loans Decision

In last month’s landmark Freeman v. Quicken Loans, Inc., No. 10-1042, 566 U.S. --- (2012) opinion, a unanimous United States Supreme Court ruled that establishing a “wrongful settlement service charge under” Real Estate Settlement Procedures Act, 12 U.S.C. §2607 (“RESPA”) required demonstrating that a charge was divided between two or more persons.

Beyond holding that RESPA excludes a single provider’s alleged “unearned fee retention”, the Freeman v. Quicken Loans, Inc. opinion is being heralded as a powerful tool for limiting regulatory discretion and overreach.

Background on RESPA

Enacted in 1974, RESPA regulates “any service provided in connection with a real estate settlement” such as “title searches, . . . title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, . . . services rendered by a real estate agent or broker, the origination of a federally related mortgage loan . . . , and the handling of the processing, and closing or settlement.” 12 U.S.C. §2602(3).

Among RESPA’s consumer-protection provisions is §2607, which furthers Congress’s stated goal of “eliminat[ing] . . . kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services.” §2601(b)(2).

Specifically, §2607(a) of RESPA provides:
“No person shall give and no person shall accept 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.”

Further, §2607(b) adds:
“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.”

Any person who violates §2607 is liable to consumers for attorneys fees and damages including three (3) times the prohibited settlement service charges. §2607(d)(2).

Although initially authorizing the Department of Housing and Urban Development (“HUD”) to “prescribe rule and regulations” and “make such interpretations necessary to achieve RESPA’s purpose, on July 21, 2011, Congress transferred these functions to the newly formed Bureau of Consumer Financial Protection (“CFP”).

Freeman v. Quicken Loans, Inc. Background

After obtaining mortgage loans from Quicken Loans, Inc. (“Quicken”), the Freeman v. Quicken Loans, Inc. plaintiffs claimed that despite being charged respective loan “discount”, “processing” and “origination” fees, Quicken’s failed to provide a lower interest rate violating §2607(b)’s prohibition on fees for which no services were provided.

The United States Court of Appeals for the Fifth Circuit affirmed the trial court’s RESPA claim dismissal on summary judgment holding that because the allegedly unearned fees were not split with another party, no §2607 violation occurred.

Freeman v. Quicken Loans, Inc. Opinion

In a unanimous decision, the Supreme Court affirmed the Fifth Circuit’s ruling that §2607(b) encompasses only a settlement-service provider’s splitting of a fee with other persons and excludes a single provider’s “unearned fee retention”.

Interestingly, and in direct contravention of the CFB’s “friend of the court brief”, the United States Supreme Court held that although RESPA’s general purpose is protecting consumers from “certain abusive practices,” RESPA provides no basis for expanding §2607(b)’s prohibition beyond that to which it is unambiguously limited.

Freeman v. Quicken Loans, Inc. Opinion’s Impact

Writing for the Court, Justice Antonin Scalia declared that HUD’s RESPA interpretation was “manifestly inconsistent with the statute HUD purported to construe” and the statute’s express language “clearly describes two distinct exchanges” not an exchange of fees of a company to itself.

Stated another way, all nine (9) justice came together to limit regulators from poaching legislator’s authority and gave the newly CFB its first judicial “time out”.

In many circles, the Freeman v. Quicken Loans, Inc. opinion is being heralded as a powerful tool for limiting regulatory discretion and overreach.

For example, to accuse financial institutions of discrimination under the 1968 Fair Housing Act and 1974 Equal Credit Opportunity Act, the Department of Justice has been using a “disparate impact analysis”, i.e., a statistical analysis which ignores the purported wrongdoer’s intent.

However, because neither statute’s express language supports “disparate impact analysis” use, the Freeman opinion suggests the entire Supreme Court is inclined to curb this type of overreaching.

Consumer Financial Protection Bureau’s 1st 6 Months

Six months have elapsed since the Consumer Financial Protection Bureau’s (“Bureau”) July 21, 2011 launch, during which “consumer financial protection” was consolidated from 7 federal agencies into the Bureau charged with protecting consumers and increasing financial transactions’ transparency.

Following a controversial director appointment, the Bureau implemented a federal “nonbank,” supervision program for mortgage companies, payday lenders, and private education lenders, released a “Supervision and Examination Manual” of banks, thrifts, and credit unions with assets exceeding $10 billion, and launched an interactive website and a Facebook page.

Bureau’s Creation and Powers
Created by Title X of the Consumer Financial Protection Act of 2010 (“Dodd-Frank Act”), the Bureau is an independent agency under the Federal Reserve System charged with protecting consumers and increasing financial transactions’ transparency.

The Dodd-Frank Act provides the Bureau with broad regulatory and rulemaking authority under numerous existing federal consumer protection laws along with the power to enact new regulations and take enforcement and supervisory actions regarding consumer financial products and the entities that deal in them, i.e., banks, financial institutions, mortgage companies, payday lenders, and private education lenders.

The Bureau embodies the consolidation of “consumer financial protection’s” from 7 federal agencies into 1 agency comprised of 6 divisions: Consumer Education and Engagement; Supervision, Enforcement, Fair Lending, and Equal Opportunity; Research, Markets, and Regulations; General Counsel; External Affairs; and Chief Operating Officer.

The Bureau regulates "consumer financial products and services" encompassing:
•extending credit and servicing loans, including mortgages;
•extending or brokering leases of personal or real property;
•providing real estate settlement services;
•engaging in deposit-taking activities;
•transmitting or exchanging funds;
•acting as a custodian of funds or any financial instrument for use by or on behalf of a customer;
•selling, providing, or issuing stored value or payment instruments;
•check cashing, check collection, or check guaranty services;
•providing payments or other financial data processing products or services;
•collecting, analyzing, maintaining, or providing consumer report information or other account information; and
•collecting debt, including foreclosing on property.

“Bureau Director” Appointed
Although it appeared that Harvard Professor Elizabeth Warren, the Bureau’s purported “architect”, would be appointed, “polarization” issues caused President Obama to nominate Richard Cordray as the Bureau’s initial director.

As Ohio’s former Attorney General, Cordray pursued claims against the consumer financial services industry including “unfair or deceptive acts or practices law” violation actions against mortgage servicers.

After 44 Republican senators indicated that they would not approve any nomination until the Dodd-Frank Act was modified to dilute the Bureau and its director’s powers, and the Senate voted down the nomination in December 2011, President Obama seated Cordray as the Bureau’s director using his executive authority.

Director Corday’s first official act was implementing a federal non-depository, or “nonbank” supervision program, defined as any company providing “consumer financial products or services but does not have a bank, thrift, or credit union charter”.

Under the new program, the Bureau will oversee nonbank business in particular markets including regulating mortgage companies, payday lenders, and private education lenders.

Additionally, the Bureau may supervise “larger participants” in the “consumer financial services industry” including debt collection, consumer reporting, prepaid cards, debt relief services, consumer credit, and money transmitting.

Bureau issues “Supervision and Examination Manual 1.0” and Launches Web Page

In October 2011, the Bureau released version 1.0 of its Supervision and Examination Manual (“Manual”), a guide to its supervision of banks, thrifts, and credit unions with assets exceeding $10 billion and tool for examining consumer products and services providers other than depository institutions.

The Manual incorporates Federal Financial Institutions Examination Council developed procedures (including its Uniform Interagency Consumer Compliance Rating System) and provides “mortgage servicing industry” “examination procedures”.

The Bureau also launched a colorful, interactive and user friendly website (www.consumerfinance.gov) and Facebook page, which has about 13,000 “likes.”

“Attorney Client Privilege” Waiver
Although federal law provides that a federally chartered institution furnishing attorney-client privileged materials to a “Federal banking agency” during an examination does not waive the privilege, the Bureau is not a statutorily defined “Federal banking agency”. 12 U.S.C. §1828(x)(1).

Rather than skip receiving privileged materials or adding itself to the “Federal banking agency’s” definition, the Bureau concluded that it is a “Federal banking agency” arguing that because it inherited supervisory authority from the other federal banking regulators, it also inherited access to privileged materials and the attorney client privilege protection.

Unfortunately because the Bureau only inherited partial supervisory authority from the federal banking agencies, the privilege may not apply to the banks’ production and rendering the produced information vulnerable to discovery in litigation or a Freedom of Information Act request.