The U.S. Court of Appeals for the Ninth Circuit recently upheld the dismissal of a claim brought under the federal Fair Debt Collection Practices Act, ruling that the borrowers' complaint failed to allege facts showing that the defendant bank was a "debt collector" under the FDCPA. In so ruling, the Court rejected borrowers' arguments that the bank was a "debt collector" because the principal purpose of some of its business activity consisted of debt collection and that, as the assignee of borrowers' loan, the bank collected the debts "due another."
However, the Ninth Circuit also rejected a per se rule that "creditors" cannot be "debt collectors" under the FDCPA.
The Ninth Circuit also concluded that the borrowers stated a claim under the federal Equal Credit Opportunity Act, ruling that default notices sent in error and indicating that the bank would accelerate the loan constituted "adverse action," given an existing loan modification agreement that fell within the ECOA's definition of "credit."
A copy of the opinion is available at: http://cdn.ca9.uscourts.gov/datastore/opinions/2013/07/03/11-16816.pdf
Plaintiffs homeowners ("Borrowers") obtained a home mortgage loan from a lender and eventually fell behind on the payments. Because of their financial difficulties, Borrowers filed a petition for bankruptcy protection, but reaffirmed the mortgage loan. The loan and underlying deed of trust were assigned to defendant Bank ("Bank").
Shortly after Borrowers' bankruptcy filing, Bank proposed a loan modification, which the bankruptcy court approved. However, despite the existence of the loan modification agreement and Bank's assurances that Bank would honor the loan modification agreement, Bank allegedly sent default notices to Borrowers, allegedly totaling five in all, stating that Borrowers' loan would be accelerated if they did not bring their loan current. After referring Borrowers' loan for foreclosure proceedings, Bank acknowledged that the loan modification agreement was in effect and that the default notices were incorrect.
Borrowers filed suit, raising allegations under the federal Fair Debt Collection Practices Act ("FDCPA") and the Equal Credit Opportunity Act ("ECOA"). Bank moved to dismiss for failure to state a claim. Ruling in Bank's favor, the lower court dismissed Borrowers' complaint. Borrowers appealed.
The Ninth Circuit affirmed in part and reversed in part, ruling that Borrowers' complaint failed to allege sufficient facts to show that Bank was a "debt collector" under the FDCPA, but that the complaint sufficiently alleged facts showing that Bank failed to comply with the ECOA's requirement to send Borrowers an adverse action notice.
As you may recall, the FDCPA provides that a "'debt collector' means "any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another. . . . [T]he 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. . . . [S]uch term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests." 15 U.S.C. § 1692a.
In addition, the ECOA prohibits a creditor from discriminating against applicants for credit on the basis of race, color, religion, national origin, sex or marital status, or age and accordingly entitles applicants against whom an "adverse action" is taken to a statement of reasons for taking certain action, such as denial or revocation of credit. See 15 U.S.C. § 1691(a)(1), (d)(2). The ECOA in turn defines "credit" to include "the right granted by a creditor to a debtor to defer payment of debt" and "adverse action" as a "denial or revocation of credit. . . ." See 15 U.S.C. § § 1691a(d), 1691(d)(6).
Addressing whether Borrowers' complaint alleged sufficient facts to show that Bank was a "debt collector" under the FDCPA, the Ninth Circuit noted that the complaint did not expressly state that the principal purpose of Bank's business was debt collection, and that the complaint failed to otherwise establish that Bank's principal business was debt collection. The Ninth Circuit also rejected Borrowers' contention during oral argument that Bank was a "debt collector" because some of its business activity had the principal purpose of collecting debts, explaining that such an expansive reading of the FDCPA would render superfluous the FDCPA's second definition of "debt collector" referring to third-party debt collection.
With respect to the second definition (i.e., a "debt collector" can also be a person who "regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another"), the Court similarly rejected Borrowers' argument that Bank was a "debt collector" because Bank was collecting on a loan originated by another lender. In rejecting this contention, the Ninth Circuit stressed that Bank's collection efforts here related to a loan it currently owned and that the FDCPA's language "owed or due another" did not refer to debts previously owed or due another.
However, the Ninth Circuit also refused to adopt a so-called per se rule established in other circuits, rejecting Bank's assertion that because it was a "creditor," it could not also be a "debt collector." See, e.g., McKinney v. Cadleway Properties, Inc., 548 F.3d 496, 498 (7th Cir. 2008)(ruling that 'debt collectors" and "creditors" are mutually exclusive categories for purposes of the FDCPA).
Turning to Borrowers' ECOA claim, the Ninth Circuit agreed with Borrowers that Bank's statements in the default notices regarding acceleration of their debt constituted a "revocation of credit" under the ECOA in light of the existing loan modification agreement. Rejecting Bank's assertion that because the default notices were erroneous and non-binding there was no "revocation of credit," the Ninth Circuit explained that such a revocation need not be valid and enforceable in order to constitute an adverse action under the ECOA.
Accordingly, the Court concluded that the complaint alleged sufficient facts to survive a motion to dismiss the ECOA claim, reasoning that Borrowers sufficiently alleged facts showing that Bank had failed to send them an adverse action notice when it sent the default notices effectively revoking the loan modification agreement.
The Ninth Circuit remanded on the ECOA claim, but affirmed the dismissal of the FDCPA claim.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Chicago, Illinois 60602
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