The U.S. Court of Appeals for the Second Circuit recently ruled that an assignee owner of home mortgage loans could be liable under the federal Fair Debt Collection Practices Act pursuant to the so-called "false name" exception, where the loan owner in collecting its own debts allegedly used a law firm to send letters to the borrowers that supposedly falsely indicated the law firm was "retained" in order to "collect a debt for" the loan owner. In so ruling, the Court concluded that the loan owner could be treated as a "debt collector" under the FDCPA.
The Second Circuit also ruled that, even though "restricting the application of section 1666d to the initial lender does not make much sense," the assignee loan owner was not liable under the federal Truth in Lending Act for allegedly failing to refund credit balances supposedly owed to the borrowers under 15 U.S.C. § 1666d, because this provision only apply to "creditors," and the assignee loan owner did not fall within TILA's definition of "creditor," which refers only to the original lender.
A copy of the opinion is available at: Link to Opinion
Plaintiffs borrowers ("Borrowers") obtained home mortgage loans from a number of different lenders. At the time of loan execution, Borrowers received from each lender the disclosure statement regarding finance charges and annual percentage rate, as required by the federal Truth in Lending Act ("TILA").
The various loan agreements identified the lenders but specified that the loans could be transferred. The original lenders subsequently sold the loans, with defendant mortgage company ("Loan Owner") ultimately acquiring Borrowers' loans. In some cases, the initial loan payment was not due until after Loan Owner had purchased the mortgage loans.
Sometime after Loan Owner acquired the mortgage loans, Borrowers all defaulted on their payments. The Borrower filed suit, asserting that Loan Owner allegedly hired a law firm ("Law Firm") to mail letters on Law Firm letterhead to debtors, informing them that they were in default and indicating that Law Firm had been retained to "collect" on the debts even though Loan Owner itself allegedly was collecting on the loans. Although the letters explained that debtors could contact Law Firm to, among other things, dispute the debt and obtain verification of the debt, the letters stated that all communications about Borrowers' defaults must be made through Loan Owner. Law Firm allegedly received a flat fee for each letter generated based on information provided by Loan Owner. Besides generating the letters, Law Firm allegedly performed no role in collecting the debts owed to Loan Owner.
Loan Owner also allegedly charged Borrowers certain fees on their accounts, including fees for property inspections that supposedly did not occur, "file reviews," and "senior lien monitoring," among others.
Borrowers' lawsuit suit alleged that Loan Owner violated the federal Fair Debt Collection Practices Act ("FDCPA") and TILA, claiming that the letters from Law Firm were unlawful under the FDCPA because the letters created the false impression that Law Firm had been hired to collect the debt on behalf of Loan Owner and that Law Firm was authorized to commence legal action against Borrowers. Borrowers further alleged that Loan Owner had improperly charged them for fees and expenses and had failed to refund the overcharges as required by TILA.
The lower court granted summary judgment to Loan Owner on the FDCPA claims, concluding that the FDCPA's so-called "false name" exception did not apply because Loan Owner had not "used" Law Firm's name, and that, accordingly, Loan Owner did not pretend to be Law firm and Law Firm was not acting as Loan Owner's "alter ego."
The lower court also ultimately dismissed the TILA claims, reasoning that Loan Owner did not meet TILA's definition of "creditor." Borrowers appealed. The Second Circuit reversed on the FDCPA issue, but affirmed the lower court's TILA ruling.
As you may recall, the FDCPA provides that "[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt" including "[t]he false representation or implication that any individual is an attorney or that any communication is from an attorney." 15 U.S.C. §§ 1692e, 1692e(3).
In addition, creditors are not considered "debt collectors" under the FDCPA unless a creditor "in the process of collecting [its] own debts, uses any name other than [its] own which would indicate that a third person is collecting or attempting to collect such debts." 15 U.S.C. § 1692a(6) (the "false-name exception").
Moreover, the TILA applies only to "creditors," but defines "creditor" in part as "the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness. . . ." 15 U.S.C. § 1602(g).
Noting that there was a factual dispute as to the nature of the work Law Firm actually performed for Loan Owner, the Second Circuit examined the scope of the false-name exception and whether Loan Owner "used" Law Firm's name to suggest Law Firm was "collecting" on the loans. See Maguire v. Citicorp Retail Servs., 147 F.3d 232, 235 (2d Cir. 1998)(addressing whether the false name exception applied to an entity affiliated with the creditor). In so doing, the Second Circuit identified three elements that must be satisfied in order to apply the false name exception to a creditor: (1) the creditor is collecting its own debts; (2) the creditor "uses" a name other than its own; and (3) the creditor's use of that name falsely indicates that a third person is "collecting or attempting to collect" the debts that the creditor is collecting.
Applying this test in the context of a number of Seventh Circuit opinions, the Court reasoned that there must be some active involvement in the misrepresentation by the creditor to trigger liability under the false name exception. See Boyd v. Wexler, 275 F.3d 642 (7th Cir. 2001)(ruling that a collection agency was liable under the FDCPA for paying a lawyer to use the lawyer's letterhead in its collection letters, because the collection agency impersonated the lawyer).
Explaining that the second element – i.e., the creditor "uses" a name other than its own -- focuses on whether Loan Owner used another's name to disguise who was actually collecting the debt, and that the third element – i.e., the creditor's use of that name falsely indicates that a third person is "collecting or attempting to collect" the debts that the creditor is collecting -- focuses on whether Law Firm's role was actually misrepresented, the Second Circuit ultimately concluded Law Firm could be found to have acted as a mere conduit for Loan Owner rather than as a bona fide debt collector.
Thus, the Second Circuit ruled, Law Firm's role as a conduit might render the letters misleading. See Nielsen v. Dickerson, 307 F.3d 623, 635 (7th Cir. 2002)(holding that creditors who retain an attorney to mass mail debt collection letters are "debt collectors" under the false name exception if the attorney has not exercised his professional judgment as to debtors' delinquency or in the decision to send a collection letter to particular debtors); White v. Goodman, 200 F.3d 1016, 1019 (7th Cir. 2000)(ruling in part that a creditor could not be liable under the false name exception where the collection agency used was a "bona fide" collection agency).
Citing various factors to consider as to whether the "true source" of a debt collection letter was a creditor or an attorney hired for such purpose, the Second Circuit concluded that Borrowers could view the letters sent by Law Firm as coming "from" Loan Owner and misrepresenting that Law Firm was attempting to collect Loan Owner's debts and would institute legal action on behalf of Loan Owner if Borrowers failed to pay their delinquencies.
In light of this possibility, the Second Circuit reversed the lower court's grant of summary judgment in favor of Loan Owner under the FDCPA, ruling that Loan Owner could be liable under the FDCPA's false name exception if Law Firm was in fact a mere "conduit" for Loan Owner that did not collect Loan Owner's debts, contrary to what the letters indicated.
The Second Circuit also noted in passing that, had they raised it, Borrowers would have had a claim that Law Firm violated the FDCPA's prohibition against "flat-rating," whereby an individual "lends" his name to a creditor in exchange for a flat rate per letter and sends a delinquency letter to the debtor portraying himself as a debt collector despite the fact that he has no meaningful involvement in the debt collection effort.
With respect to Borrowers' claim that Loan Owner violated TILA by failing to refund credit balances owed to Borrowers under 15 U.S.C. § 1666d, the Second Circuit ruled that Loan Owner was not a "creditor" under TILA because Loan Owner was not "the person to whom the debt rising from the consumer credit transaction [was] initially payable on the face of the evidence of indebtedness."
Importantly, the Second Circuit noted:
We agree with plaintiffs that restricting the application of section 1666d to the initial lender does not make much sense. Unlike most of TILA's provisions, which require creditors to make certain disclosures to debtors at the time of a loan's execution, see, e.g., id. §§ 1604, 1631-51, section 1666d imposes obligations on creditors throughout the life of the loan. Indeed, we can think of no reason why Congress would require a credit balance in a consumer's account be refunded only if the balance was maintained by the original creditor and not a subsequent assignee. Moreover, as plaintiffs note, given the widespread prevalence of mortgage loan originators selling such loans for securitization, this definition renders section 1666d inapplicable to a substantial number of mortgage loans.
… Legislative history suggests that this gap may be an unintended consequence of congressional reform to TILA. … We cannot say Congress was unaware of the consequences of changing the
definition of creditor as it debated the amendments to TILA.
…We may think it unwise to allow an assignee to escape TILA liability when it overcharges the debtor and collects unauthorized fees, where the original creditor would otherwise be required to refund the debtor promptly. But such a result is not "absurd." We will not rewrite the text of the statute, nor will we refuse to defer to the Federal Reserve's consideration of the liability of assignees in Regulation Z. We note this discrepancy, however, for the benefit of Congress and the Federal Reserve.
Because the loan agreements provided that initial loan payments were payable to an entity other than Loan Owner, the Second Circuit held that, as the assignee of the loans, Loan Owner could not be liable under TILA for failing to refund the improper fees. Accordingly, the Court affirmed the lower court's grant of summary judgment in favor of Loan Owner as to Borrowers' TILA claims.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Chicago, Illinois 60602
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