The U.S. District Court for the Northern District of Illinois recently ruled that a notice of lender-placed hazard insurance sent to a consumer in bankruptcy was not a communication in connection with the collection of a debt subject to the federal Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692, et seq. (“FDCPA”).
In so ruling, the Court rejected the borrowers’ argument that their obligations under the mortgage to maintain hazard insurance were discharged as a result of their “surrender” of the property in Chapter 13 bankruptcy.
A copy of the opinion is attached.
The borrowers (“Borrowers”) defaulted on their mortgage loan and filed for Chapter 13 bankruptcy protection. The subject property was “surrendered” in the Borrowers’ Chapter 13 plan and the plan was confirmed. The mortgage servicer (“Servicer”) sent a notice of lender-placed insurance (“Hazard Insurance Notice”) advising Borrowers that they were obligated to carry hazard insurance coverage on the property securing the mortgage.
The Hazard Insurance Notice stated that:
“Your loan agreement requires that you maintain adequate hazard insurance at all times. . . You will be charged for the cost of this insurance if we do not receive adequate proof of coverage within 15 days from the date of this letter.”
The Hazard Letter also contained the following statement:
“IF YOU ARE IN BANKRUPTCY OR RECEIVED A BANKRUPTCY DISCHARGE OF THIS DEBT, THIS LETTER IS NOT AN ATTEMPT TO COLLLECT THE DEBT, BUT NOTICE OF POSSIBLE ENFORCEMENT OF OUR LIEN AGAINST THE COLLATERAL OR FOR INFORMATIONAL PURPOSES ONLY.”
The Borrowers filed a complaint against Servicer, alleging that the Hazard Insurance Notice violated three subsections of the FDCPA, 15 U.S.C. §§ 1692g, 1692c, and 1692e, as well the Illinois Collection Agency Act, 225 ILCS 42/1, et seq. (“ICAA”).
More specifically, the Borrowers alleged that the Hazard Insurance Notice supposedly violated the FDCPA because: (1) it failed to include the “debt validation notice” information required under section 1692g; (2) it was sent at time when Servicer allegedly had actual knowledge that Borrowers were represented by counsel in violation of section 1692c; and (3) it attempted to collect a debt that Servicer had no legal right to collect in violation of section 1692e.
Servicer filed a motion to dismiss, arguing among other things that the Hazard Insurance Notice was not sent in connection with an effort to collect a debt, and thus was not subject to the restrictions of the FDCPA.
The Borrowers countered, arguing that the Hazard Insurance Notice contained language indicating it was an attempt to collect on a pre-petition debt against them personally.
As you may recall, the FDCPA regulates a communication from a debt collector only if the communication is made “in connection with the collection of any debt.” See 15 U.S.C. §§ 1692, et seq.; Gburek v. Litton Loan Servicing LP, 614 F.3d 380, 385 (7th Cir. 2010).
There is no bright line test to determine whether a communication is made in connection with the collection of a debt. Id. at 384. Rather, the court weighs several factors to determine whether a communication was made in connection with the collection of a debt, including: (1) presence or absence of a demand for payment; (2) the nature of the parties’ relationship; and (3) the purpose and context of the communications.” Id. 385 (citing Ruth v. Triumph P’Ships, 577 F.3d 790, 799 (7th Cir. 2009)).
In ruling on the motion to dismiss, the Court relied on Bailey v. Security Nat’l Servicing Corp., 154 F.3d 384, 389 (7th Cir. 1998), which recognized that informational notices without a demand for payment do not constitute attempt to collect a debt under the FDCPA.
The Hazard Insurance Notice stated that the mortgage required the property securing the loan to be insured. It further advised that if Borrowers did not purchase insurance for the property, Servicer would insure the property and the cost of that insurance would be added to the balance of their loan.
Thus, the Court held that the Hazard Insurance Notice did not demand payment, but instead advised Borrowers of the possible consequences if Servicer did not receive confirmation of insurance coverage on the property. Accordingly, the Court found that the first relevant factor weigh in favor of the conclusion that the communication was not made in connection with the collection of a debt.
Next, the Court determined that the purpose and context of the communication suggested that the Hazard Insurance Notice was not an attempt to collect a debt, but instead an effort to comply with RESPA, which required Servicer to provide notice to Borrowers before purchasing hazard insurance and billing it to Borrowers.
12 C.F.R. § 1024.37(e) provides, in relevant part:
(1) In general. Before a servicer assesses on a borrower a premium charge or fee related to renewing or replacing existing force-placed insurance, a servicer must:
(i) Deliver to the borrower or place in the mail a written notice containing the information set forth in paragraph (e)(2) of this section at least 45 days before assessing on a borrower such charge or fee. . .
See 12 C.F.R. § 1024.37(e)(1)(i).
As explained by the Court, “[t]he content of the Hazard [Insurance Notice] bolsters the conclusion that it was sent for a purpose other than debt collection. The Hazard [Insurance Notice] does not discuss a balance due on the underlying mortgage loan or discuss ways to settle that balance.”
The Court also noted that no other documents accompanied the Hazard Insurance Notice that might have provided suggestive context or changed the apparent purpose for which the Hazard Insurance Notice was sent. Therefore, the Court concluded that purpose and context of the Hazard Insurance Notice demonstrated that it was not sent in connection with the collection of any debt.
Accordingly, the Court granted the motion to dismiss.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
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Chicago, Illinois 60602
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