Banking and Finance Law Daily Foreclosure actions are ‘debt collection’ under FDCPA
Tuesday, July 24, 2018

Foreclosure actions are ‘debt collection’ under FDCPA

By Nicole D. Prysby, J.D.

Because a mortgage debt was incurred for personal or family reasons and the complaint and related documents in a foreclosure action were communications related to the debt, the foreclosure proceedings were covered by the Fair Debt Collection Practices Act, held the U.S. Court of Appeals for the Second Circuit. The court held that it did not matter that the loan servicer sought possession of the property in the foreclosure action and not collection of the debt, because the purpose of foreclosure is to obtain payment on the underlying loan. However, the court did find that the consumer failed to state a claim under the FDCPA. The court also noted that the consumer had Article III standing to bring the claim, based on his economic interest (Cohen v. Rosicki, Rosicki & Associates, P.C., July 23, 2018, Sack, R.).

Background. A consumer brought a putative class action against a mortgage-loan servicer and the servicer’s law firm, alleging that they violated the FDCPA in connection with their attempt to initiate foreclosure proceedings on his home. The consumer defaulted on his mortgage in 2009. The loan was assigned to a different holder in 2010, and that holder transferred its rights to a different servicing company, Green Tree Servicing LLC. In 2013, foreclosure proceedings began and copies of the summons and foreclosure complaint were mailed to the consumer. As required under New York law, Green Tree attached a Certificate of Merit to the complaint, certifying that it was the creditor entitled to enforce the rights. It also filed a request for judicial intervention (RJI) stating the name of the mortgage servicer. The consumer submitted a written request for information to the servicer and received a response that the servicer did not originate or own the loan, but merely services it for a third party. The consumer then filed the lawsuit, alleging that the defendants violated two different provisions of the FDCPA by identifying Green Tree and not Fannie Mae as the creditor in the foreclosure complaint, Certificate of Merit, and RJI. He alleged violations of 15 U.S.C. § 1692e, which prohibits false, deceptive, or misleading representations made in connection with collecting a debt, and 15 U.S.C. § 1692g(a), which requires debt collectors to provide debtors with the name of the "creditor to whom the debt is owed" within five days of an initial communication with a consumer regarding a debt collection.

The district court granted the defendants’ motion to dismiss, holding that enforcement of a security interest through foreclosure proceedings is not debt collection for purposes of the FDCPA. The consumer appealed.

FDCPA and foreclosure proceedings. The Second Circuit disagreed with the district court’s conclusion that actions taken within a foreclosure do not categorically constitute debt collection within the scope of the FDCPA. The FDCPA’s definition of "debt" focuses not on whether the obligation is secured, but the purpose for which it was incurred (personal, family, or household purposes). The consumer’s payment obligations under the mortgage note fell within that definition because the transaction involved property that is for his personal and family use.

The court also rejected the defendants’ argument that the complaint, summons, Certificate of Merit, and RJI did not constitute an attempt to collect the debt. FDCPA liability depends on whether the communication at issue is made in connection with a consumer’s obligation to pay a debt. It did not matter that the defendants sought not collection of the debt, but possession of the property, because the purpose of foreclosure is to obtain payment on the underlying loan, and in rem legal proceedings are not excluded from the scope of the FDCPA.

Failure to state a claim. However, the court did find reason to affirm the district court’s decision in the defendants’ argument that the consumer failed to state a claim under 15 U.S.C. § 1692e, which prohibits debt collections from making false or misleading statements in connection with the collection of any debt. Although Green Tree received the assignment of the loan after the consumer defaulted, it was a creditor under New York law, and therefore identifying itself as such for foreclosure proceedings was accurate for New York law purposes. And even if the creditor statement was inaccurate, it was not material. The allegedly false statement would not mislead the least sophisticated debtor as to the nature or legal status of the debt, or impede a consumer’s ability to respond to or dispute the debt collection. Technical falsehoods that mislead no one are immaterial. And in fact, stating accurately that Fannie Mae was the creditor to whom the debt was owed would have actually caused confusion, by leading the consumer to believe that he should make his mortgage payments to Fannie Mae.

The court also affirmed dismissal of the 15 U.S.C. § 1692g claim, agreeing with the defendants, who argued that the Certificate of Merit and RJI were exempt from the FDCPA’s definition of "initial communications" because they were part of or attached to formal pleading in a civil action. Legally required filings, held the court, are covered by the pleading exclusion. Therefore, the Certificate of Merit was excluded. In addition, the RJI was not an initial communication because although it was dated 15 days after the foreclosure complaint, it formed part of the pleading because it was mandatory under state law.

Other issues. The servicer argued that the consumer lacked Article III standing, because he alleged only a bare statutory violation. The court rejected that argument, holding that §§ 1692e and 1692g protect an individual’s concrete interests, so that an alleged violation of these provisions satisfies the injury-in-fact requirement of Article III. The court found that Congress intended to protect consumers’ economic interests and that misrepresenting a creditor in a complaint or accompanying documentation posed a risk of real harm to a consumer’s ability to defend the action.

The case is No. 17-950-cv.

Attorneys: Daniel A. Edelman (Edelman Combs Latturner & Goodwin, LLC) for Aaron Cohen. Cheryl F. Korman (Rivkin Radler LLP) for Rosicki, Rosicki & Associates, P.C. Martin Christopher Bryce, Jr. (Ballard Spahr LLP) for Ditech Financial LLC.

Companies: Rosicki, Rosicki & Associates, P.C.; Ditech Financial LLC

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