Monday, July 2, 2012

FYI: 6th Cir Holds Misidentification of Holder/Mortgagee May Violate FDCPA

The U.S. Court of Appeals for the Sixth Circuit recently held that a borrower in a residential mortgage foreclosure stated a claim for violation of section 1692e of the federal Fair Debt Collection Practices Act, where the foreclosure law firm incorrectly stated in connection with its foreclosure action that the foreclosing entity was the holder and mortgagee of the loan at the time the foreclosure complaint was filed. 
A copy of the opinion is available at: 
Plaintiff ("Borrower") purchased a home with a mortgage loan and later fell behind on the payments.  Defendant bank ("Bank"), through its foreclosure attorneys (the "Law Firm"), filed a foreclosure action against Plaintiff, asserting that Bank was the holder of the note and mortgage and that it was thus entitled to foreclose on Borrower's property.
Over a month after the filing of the foreclosure action, Bank received an assignment and transfer of the loan and recorded it in the county recorder's office. 
Borrower failed to respond to the foreclosure complaint.  The trial court accordingly entered a default judgment against Borrower and a sheriff's sale was scheduled.  Upon learning of the upcoming sale, Borrower allegedly contacted the Law Firm in an attempt to pay off the loan, but the alleged misidentification of Bank as the loan holder supposedly confused Borrower and caused delay in trying to contact the proper party for payment on the loan.  The property was eventually sold at auction.
Borrower then filed an action in federal court, alleging in part that the Law Firm had falsely represented the name of the holder and mortgagee of the loan in supposed violation of the federal Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692, et seq. ("FDCPA") and Ohio's consumer protection law.   Specifically, Borrower claimed that the Law Firm used "false, deceptive or misleading representations" in connection with the collection of the mortgage debt in violation of the FDCPA's section 1692e. 
Ruling that failure to record an assignment of mortgage prior to filing a foreclosure action was not a deceptive practice under the FDCPA, the district court dismissed Borrower's complaint for failure to state a claim under the FDCPA.  Borrower appealed the dismissal of her claim.
The Sixth Circuit reversed and remanded, ruling that Borrower had alleged a material misrepresentation sufficient to survive a motion to dismiss.
As you may recall, the FDCPA provides in relevant part that "[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.  Without limiting the general application of the foregoing, the following conduct is a violation of this section:  . . . (2) the false representation of – (A) the character, amount, or legal status of any debt; or . . . (10) The use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer."  15 U.S.C. § 1692e.  The FDCPA also allows consumers to recover damages for debt collectors' violations of section 1692e.  15 U.S.C. § 1692k.
First focusing on the date on which Bank became the real party in interest in the foreclosure action, the Appellate Court noted that Borrower specifically alleged that the Law Firm's foreclosure complaint contained false assertions that Bank was the holder and mortgagee of the loan at the time the foreclosure complaint was filed and that the Law Firm's representation confused and misled her.
The Court then examined the district court's ruling that failure to record a mortgage assignment before filing a foreclosure action did not constitute a "deceptive practice" under the FDCPA.  In so doing, the Appellate Court pointed out that in order to violate Section 1692e, a statement must be both misleading to the "least sophisticated consumer" and materially false or misleading.  The Court explained that "[t]he materiality standard simply means that in addition to being technically false, a statement would tend to mislead or confuse the reasonable unsophisticated consumer."
Applying this standard and distinguishing between the issue of Bank's standing to foreclose and the question whether the Law Firm's misidentification of the loan holder and mortgagee may be materially misleading under the FDCPA, the Appellate Court ruled that Borrower had raised sufficient facts in her complaint to allege a Section 1692e violation and to survive a motion to dismiss.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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