FYI: 2nd Cir Holds Servicing Transfer Notice Not Exempt from FDCPA

The U.S. Court of Appeals for the Second Circuit recently reversed the dismissal of a consumer's claim alleging that a mortgage loan servicer violated the federal Fair Debt Collection Practices Act ("FDCPA") by sending a servicing transfer notice that did not contain the disclosures required under the FDCPA, 15 U.S.C. 1692g.

A copy of the opinion is available at:  Link to Opinion

The borrower argued that the defendant mortgage servicer violated the FDCPA by sending him two written communications:  (1) a RESPA transfer of servicing notice, informing the borrower that that the mortgage servicer had become the servicer for the borrower's mortgage loan; and  (2) a periodic payment statement sent several months after the letter.

 

As you may recall, when debt collector sends an "initial communication with a consumer in connection with the collection of any debt," the FDCPA ( at 15 U.S.C. 1692g) imposes obligations on a debt collector to provide certain information about the loan, either in the initial communication or within 5 days thereafter by written notice.

 

The parties' disagreement centered on whether the letter was sent "in connection with the collection of any debt," which the FDCPA does not define. The mortgage servicer argued that,  because the purpose of the servicing transfer notice was to provide transfer-of-servicing information in order to comply with the federal Real Estate Settlement Procedures Act ("RESPA"), not to collect debt, it had no obligation to provide the information required by the FCPA, 15 U.S.C. 1692g.

 

The district court agreed, finding that the servicing transfer notice was informational in nature, did not refer to any amount owed or threaten to take any action, and thus was not sent to induce the consumer to make a payment.

 

On appeal, the Second Circuit began by noting that the "scope of the FDCPA's 'in connection with the collection of any debt' language" was a matter of first impression in the Second Circuit. It then quickly concluded that whether a communication is "in connection with the collection of any debt," is "a question of fact to be determined by reference to an objective standard" rather than by the sender's subjective intent.

 

The Second Circuit noted that such an objective standard to be "consistent with the FDCPA's goal of protecting consumers: if a consumer receiving a letter could reasonably understand it to be a communication in connection with the collection of a debt, then the consumer is entitled to the protections Congress mandated for such communications."

 

Citing precedent from the Sixth and Seventh Circuits, the mortgage servicer argued that – in order for a communication to be subject to the FDCPA -- the communication must be designed to induce payment, not just convey information.  The consumer, relying on a 2014 district court decision in the Second Circuit, argued that the "information/inducement dichotomy" should be rejected because the phrase "in connection with" is a synonym for "related to, associated with, and with respect to" and does not include any element of inducement to pay.

 

The Second Circuit side-stepped the issue, "concluding that an attempt to collect a debt—which we believe the Letter was—qualifies as a communication 'in connection with the collection of any debt.'"

 

The Appellate Court then held that, viewed objectively, the consumer sufficiently alleged that the servicing transfer notice was an attempt to collect a debt because it:  (a) referred to the consumer's particular debt;  (b) instructed him to send payments to the new servicer at a particular address;  (c) contained boilerplate language expressly stating that "this is an attempt to  collect upon a debt" specifically referencing the FDCPA; and,  (d) warned that he must dispute the debt's validity within 30 days after receiving the letter or the debt would be assumed to be valid.

 

Rejecting the servicer's argument that the purpose of the letter was merely to convey information required by RESPA, the Second Circuit reasoned that a reasonable consumer would take the letter at face value and understand it as an attempt to collect a debt.

 

In addition, the Second Circuit saw no reason why the servicing transfer notice could not serve more than one purpose. In a footnote, the Court stressed that although 15 U.S.C. 1692g provides that a communication required by certain statutes, such as the Gramm-Leach-Bliley Act, "shall not be treated as an initial communication in connection with debt collection for purposes of this section," RESPA is not one of those data privacy statutes.

 

The Court also rejected the servicer's argument that it would be unfair to deem the language required by the FDCPA as evidence that the letter was really an attempt to collect a debt, reasoning that recipient consumer "has no reason to know that the language is required by the FDCPA or the believe that the language mandated by § 1692e can safely be disregarded on that basis." The Second Circuit pointed out that "[w]hile it may be unfortunate for debt collectors that the use of a defective notice helps give rise to an obligation to provide a proper notice, the solution is to improve the defective notice."

 

Turning to the periodic payment statement, the Second Circuit determined that it did not have to decide whether the consumer adequately alleged the statement constituted a communication in connection with the collection of a debt because:  (a) the duty to provide the § 1692g notice arises only upon the initial communication with a consumer; and  (b) a consumer can only recover once for failure to comply with § 1692g's notice requirements, regardless of the number of collection communications.

 

According to the Court, because the consumer plausibly alleged that the letter was sent "in connection with the collection of [a] debt," any allegations pertaining to the later payment statement were irrelevant.

 

The Second Circuit concluded that because the consumer sufficient alleged that the servicing transfer notice was an "initial communication … in connection with the collection of [a] debt, which required the debt collector to provide the consumer with a § 1692 notice, the district court "erred in dismissing the amended complaint and ruling as a matter of law that the Letter did not trigger § 1692g's notice requirement," and remanded the case for further proceedings.

 

 

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 493-0874
Fax: (312) 284-4751
Email: rwutscher@mauricewutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Fla App Ct (2nd DCA) Holds Only "Substantial Compliance" with Mortgage Notice of Default Provisions Is Required

The District Court of Appeal of Florida, Second District, recently upheld a mortgagee's notice of default that substantially complied with the applicable provision of the mortgage, ruling that strict compliance is not required.

 

A copy of the opinion is available at:  Link to Opinion

 

The borrowers obtained a mortgage in May of 2007 and defaulted in November of 2008. In December of 2008, the mortgagee sent the borrowers a letter demanding that they cure the default within 30 days, providing the amount needed to reinstate the loan, and warning that failure to cure would result in acceleration and foreclosure.

 

In February of 2009, the mortgagee filed a foreclosure action. The borrowers failed to respond, and a clerk's default was entered against them in April of 2009. In December of 2009, the mortgage was assigned to a different company, who was substituted as plaintiff.

 

The borrowers eventually filed an answer generally denying the material allegations of the complaint and asserting affirmative defenses, including lack of proper notice and opportunity to cure prior to filing the foreclosure action.

 

In December of 2013, the borrowers moved for summary judgment, arguing that the December 2008 default letter failed to specify the default adequately, advise the borrowers of their right to reinstate and raise the nonexistence of a default or other defenses, and specify where payment must be sent. The trial court found that the letter failed to adequately advise the borrower of their right to reinstatement and raise defenses and granted the motion, dismissing the complaint without prejudice, and the servicer appealed.

 

On appeal, the Court first pointed out that the notice provision in the mortgage is a condition precedent that the mortgagee must satisfy before filing the foreclosure action, and framed the issue before it as whether there existed any genuine issue of material fact as to whether the mortgagee's December 2008 default letter satisfied the contractual condition precedent.

 

The Court next pointed out that the dispute centered not on whether the letter contained the five items of information required by the mortgage, but on whether the information provided was sufficient. The Court also pointed out that the borrowers were not arguing that they were harmed as result of the alleged deficiencies in the letter, but that strict compliance with the mortgage's default provision was required. The servicer, on the other hand, argued that substantial compliance sufficed.

 

The Court reasoned that, although case law in Florida has not resolved the precise question presented as to the adequacy of the default notice, the case law in Florida is clear that the general rules of contract interpretation apply to mortgages.

 

The Court also held that it is also settled that in Florida, the test of whether a party has complied with a contractual condition precedent is substantial compliance or performance. The borrowers offered no reason, and the Court could find none, to treat a condition precedent in a mortgage differently.

 

The Court rejected the borrower's argument that the Florida Fifth District Court of Appeals' decision in Samaroo v. Wells Fargo Bank, N.A. 137 So. 3d 1127 (Fla. 5th DCA 2104), required strict compliance with conditions precedent, reasoning that in Samaroo, the mortgagee's notice letter was completely missing one of the required items--the right to reinstate after acceleration--and merely held that the letter's silence as to one of the requirements was not substantial compliance.

 

After concluding that substantial compliance is the applicable legal standard, the Court turned to whether the notice letter substantially complied because it told the borrowers that the 'may" have the right to reinstate and raise defenses in a foreclosure action.

 

The Court rejected the borrowers' hyper-technical argument that the word "shall" was required in connection with the right to reinstate, relying on its decision in U.S. Bank National Ass'n v. Busquets, 135 So. 3d 488 (Fla. 2d DCA 2014), which reversed the trial court's summary judgment for the borrowers because the right to reinstate was conditional, not absolute, and the use of the word "may" was correctly used to describe the right to reinstate.  Because the right to reinstate was conditioned upon paying all amounts due under the note and mortgage, the court in Busquets held that the notice letter adequately informed the borrowers of their right to reinstatement.

 

The Court applied the same reasoning to reject the borrowers' argument that the notice letter did not adequately inform the borrowers of their right to defend the foreclosure action, reasoning that the right to contest whether a default occurred and assert defenses depends on whether a factual and legal basis to do so exists.

 

Because the borrowers vigorously defended the foreclosure action, the Court concluded that the notice letter served its purpose and substantially complied with the mortgage by apprising the borrowers of their right to contest the foreclosure action.

 

Finally, the Court rejected the borrowers' argument that the notice letter was defective because failed to specify the default, accurately calculate the payment required to cure the default and reinstate the mortgage, and specify the address where payment must be sent.

 

First, the letter adequately specified the default because it mentioned the November 2008 missed payment. It was not required to also specify that the next payment, for December of 2008, was also missed, since the borrowers either knew or could easily ascertain this fact.

 

Second, the letter was not defective because it included the January 2009 payment, which was not yet due when the letter was sent, because there was no evidence that the borrowers intended or attempted to reinstate the loan before the January payment came due. In addition, the notice was not misleading because it expressly stated the January payment was included in the amount needed to reinstate. In short, the inclusion of the January 2009 payment did not preclude a finding of substantial compliance.

 

Finally, the Court rejected the borrowers' argument that the notice letter was required to specify the address where the reinstatement payment must be sent because the address was easily ascertainable from the note, which showed the address for payments, and the mortgage, which referred to the address in the note. In addition, the borrowers could call the customer care telephone number in the notice letter.

 

The Court concluded by explaining that the standard default paragraph in the mortgage "is designed to ensure that a borrower receives essential information concerning his or her default, how to cure it, and his or her rights with respect to it. It is not a technical trap designed to forestall a lender from prosecuting an otherwise proper foreclosure action because a borrower, after the fact, decides that the letter might have been better worded."

 

Because the notice letter either actually or substantially complied with the default and notice requirements of the mortgage, the Court reversed summary judgment for the borrowers and remanded the case for further proceedings.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

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FYI: Mortgage Lender Wins Two Significant FHA "Disparate Impact" Victories

A large mortgage lender recently prevailed against both the City of Los Angeles and the County of Cook, Illinois, in lawsuits alleging "disparate impact" discrimination in violation of Title VIII of the Civil Rights Act of 1968, 42 U.S.C. § 3601 et seq., more commonly known as the federal Fair Housing Act ("FHA").

 

As you may recall, the City of Los Angeles alleged that Wells Fargo & Co. and Wells Fargo Bank, N.A. "engaged in a continuous pattern and practice of mortgage discrimination in Los Angeles since at least 2004 by imposing different terms or conditions on a discriminatory and legally prohibited basis."

 

According to the City of Los Angeles, the alleged pattern and practice of lending discrimination "consist[ed] of traditional redlining and reverse redlining, both of which have been deemed to violate the [FHA] by federal courts throughout the country." 

 

The City alleged that "Wells Fargo engaged in reverse redlining, and continues to engage in such conduct, by extending mortgage credit on predatory terms to minority borrowers in minority neighborhoods in Los Angeles on the basis of the race and ethnicity of its residents," and that "Wells Fargo's redlining and reverse redlining allegedly resulted in both intentional discrimination and disparate impact discrimination."

 

The City of Los Angeles identified eight types of allegedly "predatory" home loans that Wells Fargo supposedly extended to minority borrowers:  "(1) high-cost loans (defined by the City as loans with an interest rate three percentage points or more above the federally established benchmark); (2) subprime loans; (3) interest-only loans; (4) balloon payment loans; (5) loans with prepayment penalties; (6) negative-amortization loans; (7) no-documentation loans; and (8) adjustable rate mortgage loans with 'teaser' rates."  The City also took issue with Wells Fargo's "United States Federal Housing Authority" loans – i.e., FHA loans -- which the City alleged also included "higher risk features such as higher fees and higher interest rates."

 

The U.S. District Court for the Central District of California rejected the City's allegations, granting Wells Fargo's motion for summary judgment.  A copy of opinion is attached.

 

The Court in the City of Los Angeles action noted that the statute of limitations for FHA claims is two years, but the discriminatory conduct alleged by the City of Los Angeles reached back nearly a decade.  The Court held:

 

In order for the City to sue Wells Fargo for all discriminatory conduct in the last ten years, the City must prove that the continuing violations doctrine applies. The doctrine allows conduct that occurred outside the limitations period into the suit on the condition that the City proves there is a continuous unlawful practice that continued into the limitations period. The City must prove that Wells Fargo violated the Act within the limitations period. … Stated differently, the core issue for this phase of the litigation is whether Wells Fargo violated the Act during the limitations period triggering the continuing violations doctrine.

 

The Court held that, in order for liability to exist for a disparate impact claim, "there is simply no question that the statistical disparity must be 'sufficiently substantial' or 'significant.'"  The Court also held that "the Supreme Court's recent guidance in Inclusive Communities precludes the City's statistical disparity evidence from creating a genuine dispute regarding a prima facie case," as the "Court must examine the City's prima facie evidence 'with care.'"

 

The Court held that the City of Los Angeles failed to "provide evidence of a significantly disproportionate effect on minorities, and comparing thousandths of a percentage fails to meet the minimum threshold of Inclusive Communities."

 

The Court also held that, under Inclusive Communities, the "[t]he City was required to point to a Wells Fargo policy or policies that caused the disparity," and that "[t]he City's entire disparate impact claim must 'solely' seek to remove a policy that is "artificial, arbitrary, and [an] unnecessary barrier[]."

 

The Court ruled that "the City fails to actually identify any policy that created an artificial, arbitrary, or unnecessary barrier.  Instead, the City argues that a lack of a policy [of risk management and monitoring] produced the disparate impact. There is no authority that suggests that disparate impact claims are designed to impose new policies on private actors. … Without identifying an actual policy that creates a barrier, the City cannot base its disparate impact claim on Wells Fargo's practice of issuing high-cost loans."

 

In addition, the Court ruled that "the City is essentially advocating for racial quotas."  However, the Court noted, "[i]n Inclusive Communities, the Supreme Court specifically noted that disparate impact claims must not force private actors to 'adopt racial quotas'" and that "such quotas 'raise[] serious constitutional concerns.'"

 

In the words of the Court:

 

The City is arguing that the lack of an unconstitutional racial quota is the cause of the statistical discrepancy in this case. Wells Fargo cannot constitutionally issue high-cost loans based on a racial quota system, and its lack of such a policy does not create a prima facie case of disparate impact under the Act.  Not only did the City fail to identify any policy that caused the negligible statistical disparities, it advocates for the implementation of 'serious constitutional concerns.'

 

Accordingly, the Court held there is no genuine dispute of fact that Wells Fargo did not did not violate the FHA during the 2-year limitations period, and without an FHA "continu[ing] into the limitations period," the continuing violations doctrine does not apply.  Wells Fargo was therefore entitled to summary judgment.

 

Similarly, the County of Cook, Illinois, alleged that various Wells Fargo affiliates extended "predatory subprime mortgage loans" that were concentrated in the County's predominantly minority neighborhoods. Cook County alleged that this practice resulted in urban blight and a reduced property tax base, all in supposed violation of the FHA.

 

The Court noted that the "United States Department of Justice ("DOJ") sued Wells Fargo over precisely these alleged practices under the FHA, as did the Attorney General of Illinois under parallel provisions of the Illinois Human Rights Act, 775 ILCS 5/1 et seq.," and that "both cases were resolved in 2012 with consent decrees.  See United States v. Wells Fargo Bank, NA, 891 F. Supp. 2d 143 (D.D.C. 2012); People of the State of Illinois v. Wells Fargo & Co., Final Judgment and Consent Order, No. 09 CH 26434 (Cir. Ct. of Cook County, July 12, 2012).

 

The Court further noted that "[i]ts residents already having been directly compensated for their injuries, Cook County filed this federal suit in November 2014 seeking compensation only for its own injuries as a corporate person."

 

The U.S. District Court for the Northern District of Illinois granted Wells Fargo's motion to dismiss on the ground that Cook County is not within the FHA's "zone of interests."  A copy of the opinion is also attached.

 

Among other things, Wells Fargo argued that Cook County does not have "statutory standing" because it is not an "aggrieved" person within the FHA's meaning. See 42 U.S.C. § 3602(i)(1) ("'Aggrieved person' includes any person who … claims to have been injured by a discriminatory housing practice.") 

 

Although the Court agreed with the numerous other courts that have held that municipalities and counties have constitutional standing to sue under the FHA, the Court held that "statutory standing" is not coextensive with "constitutional standing," citing the Supreme Court of the United States' recent opinions in Thompson v. North American Stainless, LP, 562 U.S. 170 (2011), and Lexmark International, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377 (2014).

 

Examining the language of various section of the FHA, the Court concluded that Cook County's alleged injuries —i.e., urban blight and a reduced property tax base — "while perhaps the consequences of reverse redlining or equity stripping writ large, do not bring it within [the FHA]'s zone of interests."  According to the Court, "Cook County's alleged injuries … are purely derivative and not the type that the FHA was designed to protect. The county's claims thus fall outside the zone of interests."

 

Accordingly, the Court granted Wells Fargo's motion to dismiss.  However, the Court held that "[a]lthough the court doubts that Cook County could cure the zone-of-interests defect the dismissal is without prejudice, and the county is granted leave to file an amended complaint by August 14, 2015.  … If Cook County does not replead by that date, thereby electing to stand on its complaint, the suit will be dismissed with prejudice."

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

CALIFORNIA   |   FLORIDA   |   ILLINOIS   |   INDIANA   |   NEW JERSEY   |   NEW YORK   |   OHIO   |   PENNSYLVANIA   |   TEXAS   |   WASHINGTON, D. C.

 

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