The U.S. Court of Appeals for the Second Circuit ("Second Circuit") recently held that a debt collector violated the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. ("FDCPA"), when it sent a payoff statement containing unaccrued fees and costs without providing any information as to how those fees were calculated or any basis for those fees and costs.
In so ruling, the Second Circuit was careful to note that a payoff statement may contain estimated fees and costs if the information in the statement would allow the least sophisticated consumer to determine the minimum amount she owed at the time of the notice, what she needed to pay to resolve the debt in the future, and how the debt collector calculated the fees and costs.
A copy of the opinion is available at: Link to Opinion
A law firm ("Debt Collector") filed a foreclosure complaint against the borrower ("Borrower"). The Debt Collector attached a notice to the complaint which contained the following language: "the amount of the debt is stated in the complaint hereto attached," and also that "the debt … will be assumed valid … unless the debtor, within thirty (30) days after receipt of this notice, disputes the validity of the debt." However, the foreclosure complaint did not state the amount of the debt.
The Borrower sent a request for verification of the debt. In its response, the Debt Collector provided a payoff statement with the "Total Amount Due" of $205,261.79 (the "Debt Validation Letter"). Below the statement of the amount due, the Debt Validation Letter added the following language:
"To provide you with the convenience of an extended 'Statement Void After' date, the Total Amount due may include estimated fees, costs, additional payments and/or escrow disbursements that will become due prior to the 'Statement Void After' date, but which are not yet due as of the date of this Payoff Statement is issued. You will receive a refund if you pay the Total Amount Due and those anticipated fees, expenses, or payments have not been incurred."
Notably, the Debt Validation Letter did not indicate what those estimated fees, costs, or additional payments were or how they were calculated.
As you may recall, FDCPA requires a debt collector, within five days after the initial communication with a consumer in connection with the collection of any debt, to send the consumer a written notice containing among other things the amount of the debt. 15 U.S.C. § 1692g(a).
Here, the Borrower alleged that the filing of the foreclosure complaint was an initial communication, and that the Debt Collector violated the FDCPA because the complaint did not provide the total amount due. Alternatively, the Borrower alleged that the Debt Validation Letter did not satisfy section 1692g because the amount due included unaccrued and unspecified fees and costs.
The trial court held that the foreclosure complaint was not an attempt to collect a debt within the meaning of section 1692g, and dismissed the complaint. The Borrower appealed.
As you may recall, section 1692g(d) states that "[a] communication in the form of a formal pleading in a civil action shall not be treated as an initial communication for purposes of [section 1692g(a)]."
Nevertheless, the Borrower argued that the Debt Collector was not required to attach the notice to the foreclosure complaint, and therefore it was not considered part of the "formal pleading" as contemplated in the statute.
The Second Circuit rejected this argument because the Borrower's interpretation would render section 1692g(d) superfluous. Thus, the Second Circuit held that the exclusion provided by 1692g(d) extended to exhibits attached to the foreclosure complaint.
The Borrower then argued that the Debt Validation Letter was an attempt to collect a debt, even though it was sent in response to Borrower's request for validation of the debt.
In Hart, the Second Circuit held that the letter in question was unambiguously sent in connection with the collection of a debt because: (1) the letter directed the recipient to mail payments to a specified address, (2) the letter referred to the FDCPA by name, (3) the letter informed the recipient he had to dispute the debt validity within thirty days, and (4) most importantly, the letter contained a disclaimer stating that the communication was an attempt to collect a debt. Hart v. FCI Lender Servs., 797 F.3d 219 (2nd Cir. 2015).
Applying the factors in Hart, the Second Circuit determined that the Debt Validation Letter in this case was analogous to the letter in Hart. Therefore, even though Debt Collector sent the Debt Validation Letter in response to the Borrower's request, the Court held that the communication was sent in connection with the collection of a debt and was subject to the requirements in section 1692g.
Next, to determine whether the Debt Collector had violated section 1692g, the Second Circuit analyzed the debt validation letter under the "least sophisticated consumer" standard.
Here, the Court noted that the Debt Validation Letter did not specify what the estimated fees, costs, and additional payments were. In the view of the Second Circuit, this made it impossible for an unsophisticated consumer to dispute the amount of the debt.
The Second Circuit concluded that the Debt Validation Letter did not comply with section 1692g, because the correspondence provided no indication as to what the unaccrued fees were or how they were calculated.
The Second Circuit was careful to limit its ruling to the facts in this case.
Here, the Court noted, he Debt Validation Letter omitted crucial information that would allow a least sophisticated consumer to determine the minimum amount she owed at the time of the notice, what she needed to pay to resolve the debt at any given moment in the future, and how the total balance would increase based on the estimated fees and costs.
However, the Second Circuit noted that a payoff statement could satisfy section 1692g if the statement provides adequate disclosure for how the creditor arrived at the total amount due.
Accordingly, the Second Circuit vacated the order and judgment of dismissal, and remanded the case to trial court for further proceedings consistent with its ruling.
Ralph T. Wutscher
Maurice Wutscher LLP
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