Wednesday, May 9, 2012

FYI: 6th Cir Holds Treating Loan as In Default At Time of Acquisition Triggers FDCPA Liability

The U.S. Court of Appeals for the Sixth Circuit recently held that the federal Fair Debt Collection Practices Act's ("FDCPA") definition of "debt collector" includes loan owners and servicers that either acquired a debt in default or treated a debt as if it were in default at the time of the acquisition. 
A copy of the opinion is available at:
A borrower claimed to have made a double payment on her mortgage loan for a single month, and therefore did not make the following month's payment.  The prior owner of the loan claimed that the borrower's account was delinquent.  Around the same time, the prior owner sold the loan and related servicing rights to the current owner and servicer, which became defendants in this case.
The borrower alleged that despite her purported payments, the servicer (1) began dunning the borrower and her husband, the latter of whom purportedly was not a borrower on the loan; (2) made numerous collection calls to both the borrower and her husband, despite "do not call" requests; (3) threatened foreclosure; (4) assessed monthly late fees; and (5) reported derogatory credit information to the credit reporting agencies. 
The borrower therefore sued the current loan owner and servicer in federal court, alleging various violations of FDCPA.  The loan owner and servicer both moved for summary judgment, arguing that they were not "debt collectors" under the FDCPA, because of the borrower's allegation that the loan was not actually in default.  The servicer further argued that as a servicer, it did not fall under the definition of debt collector.  The loan owner further argued that as the purchaser of the loan, it was a creditor and not a debt collector. The lower court found that neither the loan owner nor the servicer were debt collectors, and so dismissed the complaint.  The borrower appealed. 
As you may recall, the FDCPA defines a "debt collector" as any person who uses any instrumentality of interstate commerce to collect debts owed (or allegedly owed) to another.  15 U.S.C. Sec. 1692a(6).  The definition also includes those who collect their own debts using the name of another, "which would indicate that a third person is collecting or attempting to collect such debts..."  Id.  However, the definition of "debt collector" does not include a debt which was not in default at the time it was obtained by the collecting entity.  Id. 
The Sixth Circuit began its analysis by considering whether an entity might acquire and attempt to collect on a debt, without qualifying as either a creditor or debt collector under the FDCPA.  The Court answered in the negative, holding that an entity that did not originate, but acquired and attempted to collect on, a debt "is either a creditor or a debt collector depending on the default status of the debt at the time it was acquired."  Similarly, the Court held that a loan servicer can either "stand in the shoes of a creditor or become a debt collector," again depending on whether the debt was in default when the servicer began servicing the loan
The Court rejected the argument that neither the loan owner nor the servicer was a debt collector, due to the borrower's allegation that the loan was never in default.  To reach that conclusion, it cited the statutory definition of debt collector, which refers to both actual obligations and "alleged" obligations, as well as to debts that are "asserted" to be owed.  15 U.S.C. Sec. 1692a(5)-(6).  Accordingly, the Sixth Circuit held that "a debt holder or servicer is a debt collector when it engages in collection activities on a debt that is not...actually owed."  
Based on the foregoing, the Sixth Circuit held that "the definition of debt collector pursuant to Sec. 1692a(6)(f)(iii) includes any non-originating debt holder that either acquired a debt in default or has treated the debt as if it were in default at the time of acquisition." 
Having made that determination, the Sixth Circuit examined the borrower's FDCPA allegations, and found that they were sufficient to state a claim.  Accordingly, the Court reversed the decision of the lower court, and remanded the matter for further proceedings. 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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