FYI: 11th Cir Holds No FCRA Violation for Reporting Forbearance Payments as "Past Due" and "Delinquent"

The U.S. Court of Appeals for the Eleventh Circuit recently held that the reporting of a mortgage account as past due and delinquent during a forbearance plan was neither inaccurate nor materially misleading under the federal Fair Credit Reporting Act, 15 U.S.C. § 1681, et seq. (FCRA).

 

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

 

The plaintiff borrower lost her job and enrolled in an unemployment forbearance plan with her mortgage loan servicer.  The forbearance plan called for "monthly forbearance plan payments" of $25.00 for a period of six months.

 

The forbearance plan stated that during the forbearance period, the servicer would "report to the credit bureaus that you are paying under a partial payment agreement for your [home mortgage]."  Additionally, the servicer told the borrower that her payments would still be considered late because the forbearance payments was not the contractual payment.

 

The borrower sold her home and paid off the loan by June 1, 2013.  Subsequently, the borrower attempted to purchase a new home and obtained a credit report.  She discovered that the servicer reported the loan to the credit reporting agencies (CRAs) as "past due" and "delinquent."  Specifically, the servicer reported the account past due during the forbearance period, and it listed a past due amount of $22,308 as of June 2013.

 

Over the next year and a half the borrower filed several disputes with the CRAs regarding the loan.  In response to the disputes, the servicer updated the loan's status as "paid in full" and changed the "amount past due" to $0.00.  However, the servicer did not remove or suppress the past due payments during the forbearance period in the payment history.

 

The borrower was denied financing.  She filed a complaint alleging that the servicer violated 15 U.S.C. § 1681s-2(b) by failing to conduct a reasonable investigation in response to her disputes.

 

The trial court granted the servicer's motion for summary judgment and denied the borrower's cross motion.  In so ruling, the trial court held that the servicer's reporting was not inaccurate or materially misleading.

 

This appeal followed.

 

As you may recall, section 1681s-2(b) of the FCRA require furnishers of information, including mortgage servicers, to conduct an investigation after receiving notice from a CRA of a dispute from a consumer regarding information reported by the furnisher.  15 U.S.C. § 1681s-2(b). 

 

Upon receipt of a notice from a CRA that a consumer disputes the completeness or accuracy of any information provided by a furnisher, the furnisher must (1) conduct an investigation with respect to the disputed information; (2) review all relevant information provided by the CRA; and (3) report the results of the investigation to the CRA. 

 

If the furnisher's investigation determines that an item of information disputed by a consumer is incomplete, inaccurate, or cannot be verified, the furnisher must either modify, delete, or permanently block reporting of that information.  Further, with respect to information the furnisher finds to be inaccurate or incomplete, the furnisher must report those results to all other CRAs.

 

The borrower argued that the servicer's reporting was inaccurate because:  (1) the "Scheduled Monthly Payment Amount" was $2,197.38 per month every month, including the forbearance period when her monthly payments were only $25.00; and (2) the payments on the account were "past due" and "delinquent" despite her monthly payments under the forbearance plan. 

 

However, the Eleventh Circuit found that FCRA required the servicer to furnish information regarding the loan's status and payment history under the terms of the promissory note.  Unless the forbearance plan modified the note, the borrower's compliance with the terms of a second, separate agreement she entered with the servicer had no bearing on the accuracy of the information the servicer reported to the CRAs.

 

Thus, the Eleventh Circuit determined that the servicer's reporting of the scheduled payment and payment history was not inaccurate or materially misleading.

 

Next, the borrower argued that the Consumer Data Industry Association's guidelines regarding credit reporting ("CDIA Guidelines") required the servicer to (1) report the "Scheduled Monthly Payment Amount" to be the "new" payment amount for loans in forbearance; and (2) include the "Special Comment Code" of "CP" to indicate that the loan was in forbearance, which the servicer did not do.  The borrower also argued that the Fannie Mae Servicing Guide instructed the servicer to follow the CDIA Guidelines. 

 

The Eleventh Circuit observed that the CDIA Guidelines did not preclude the servicer from reporting the account as "past due" and "delinquent" for the months that the borrower did not make full payments under the note.  The borrower's argument that the servicer must report the loan as current during the forbearance period, in the Eleventh Circuit's view, misconstrued the servicer's reporting obligations under FCRA.  During the forbearance period, the loan was past due and delinquent under the original terms of the loan.

 

Thus, even if the servicer had reported the $25.00 forbearance payment, the Eleventh Circuit noted that it would not have been inaccurate for the servicer to report that the loan as past due because the borrower was not contractually current.

 

The Eleventh Circuit also noted that reporting the Scheduled Monthly Payment Amount as $25.00 while simultaneously reporting the account as "past due" and "delinquent" could be misleading, as prospective lenders may have interpreted the report to mean that the borrower did not pay the lower $25.00 per month payment. 

 

Further, if the servicer reported that the borrower had made payments under the note as agreed when she was in fact paying only $25.00 per month, the report would have conveyed that the borrower fully met her payment obligations under the note, which was not true.

 

In sum, the forbearance agreement between the borrower and the servicer did not legally modify the terms of the note, and the borrower was past due and delinquent during the forbearance plan. Therefore, the Eleventh Circuit concluded that the servicer's reporting was accurate.

 

Accordingly, the Eleventh Circuit affirmed the judgment of the trial court granting the servicer's motion for summary judgment.

 

 

 

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: 7th Cir Holds Debt Collector Did Not Violate FDCPA By Complying With State Procedural Rule

The U.S. Court of Appeals for the Seventh Circuit recently held that service of a motion for default judgment directly upon a plaintiff consumer known to be represented by counsel did not violate the FDCPA, where the plaintiff's attorney had yet to file a formal appearance. 

 

In so ruling, the Seventh Circuit reversed the trial court's judgment in favor of the consumer because the state procedural rule at issue required the motion to be served directly upon the consumer, thus triggering the safe harbor provision of subsection 1692c(a)(2) of the FDCPA which prohibits direct contact with a represented debtor "[w]ithout … the express permission of a court of competent jurisdiction."

 

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

 

After a consumer ("Consumer") failed to pay her credit card bill, the creditor ("Creditor") retained counsel ("Creditor Law Firm") to collect the debt.

 

The Creditor Law Firm filed suit in Illinois state court against Consumer (the "Collection Suit"), who initially appeared pro se, but later retained counsel ("Consumer's Attorney").  The Consumer's Attorney sent a letter to the Creditor Law Firm advising of his representation and appeared at two hearings on the Consumer's behalf, wherein trial call orders identified that the Consumer's Attorney was present before the court, but did not identify him or his firm by name.

 

The Creditor Law Firm eventually moved for default judgment against the Consumer, and served the motion upon both the Consumer and the Consumer's Attorney, who had yet to file a formal written appearance in the Collection Suit. 

 

The Consumer filed the instant, underlying suit against the Creditor Law Firm in the Northern District of Illinois alleging that its service of the motion for default judgment upon the Consumer violated subsection 1692c(a)(2) of the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. ("FDCPA") which prohibits "communicat[ions] with a consumer in connection with the collection of any debt ... if the debt collector knows the consumer is represented by an attorney with respect to such debt."  15 U.S.C. §1692c(a)(2).

 

The parties filed cross-motions for summary judgment, wherein the Creditor Law Firm invoked the safe harbor provision within the relevant subsection of the FDCPA which prohibits direct contact with a represented debtor "[w]ithout.. the express permission of a court of competent jurisdiction."  15 U.S.C. § 1692c(a)(2). 

 

The Creditor Law Firm pointed to Rule 11 of the Illinois Supreme Court Rules, which requires service of court papers subsequent to the summons and complaint, upon the "attorney of record," if there is one, but "[o]therwise" requires service on the party directly.  Because the Consumer's Attorney had not yet filed a written appearance at the time of service of the default motion, the Creditor Law Firm argued that on its understanding of Rule 11, it had no choice but to send the default motion to the Consumer, and that the rule provided "express permission" to do so.

 

The trial court rejected this reading of Rule 11, calling it "hyper-technical," concluding that Illinois trail judges have discretion to recognize a lawyer as a part's attorney of record in absence of a written appearance, and that the presiding judge in the Collection Suit did so by checking the boxes on the call orders showing that "defendant's counsel" was "present before the court."  Accordingly, summary judgment was entered in the Consumer's favor and against the Creditor Law firm.  The instant appeal followed.

 

On appeal, the Seventh Circuit noted that in Thomas v. Law Firm of Simpson & Cybak, 392 F.3d 914, 920 (7th Cir. 2004), it suggested, in dicta, that "[c]ourt rules permitting service could be interpreted as granting … express permission" under 1692c(a).  Here, Illinois Supreme Court Rule 11(a) governed service of the default judgment motion, which provides that "[i]f a party is represented by an attorney of record, service shall be made upon the attorney. Otherwise service shall be made upon the party." Ill. Sup. Ct. R. 11(a). 

 

The Court reasoned that a court expressly requiring a certain action obviously permits that action, and therefore a rule requiring service directly on a party expressly permits such service. 

 

Accordingly, at issue was whether the Consumer Attorney was the Consumer's "attorney of record" when the default motion was filed.

 

The Consumer argued that Consumer's Attorney became her "attorney of record" he appeared at the two hearings in the Collection Suit, and the state court entered orders indicating his presence.  However, the Seventh Circuit found that this "sliding-scale approach" in which the status of an attorney of record for Rule 11 purposes depends on the its degree of participation cannot be reconciled with Illinois' bright-line rule -- established in a number of cases cited by the Seventh Circuit -- that a lawyer can become an attorney of record within the meaning of Rule 11 only by filing a written appearance or other pleading with the court and does not become an attorney of record simply by representing a party. 

 

While the Consumer cited a string of Illinois appellate court rulings to support her argument that trial courts have the discretion to recognize a lawyer as the attorney of records without a written appearance or pleading, the Seventh Circuit rejected these and other cited cases because they all dealt with circumstances outside the Rule 11 context.

 

Additional arguments of Rule 11's preemption by the FDCPA and that service on the party as required by Rule 11 can be accomplished by serving the attorney as the part's "agent" were respectively rejected by the appellate court as "verg[ing] on frivolous" and an "unsound reading of the rule."

 

Because Illinois courts have consistently established a bright-line approach which establishes an attorney of record for Rule 11 purposes only upon the filing of a written appearance or other pleading with the court, the Seventh Circuit concluded that "acquir[ing] the status as attorney of record for purposes of Rule 11 requires a written appearance or other pleading filed in court.  Period." 

 

Accordingly, the Seventh Circuit held, the Creditor Law Firm's compliance with that rule did not violate section 1692c(a)(2) of the FDCPA, and the trial court's judgment in Consumer's favor was reversed and remanded for entry of judgment in the Creditor Law Firm's favor.

 

 

 

 

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: 7th Cir Holds Field Servicing Company That Installed Door Hangers Not FDCPA "Debt Collector"

The U.S. Court of Appeals for the Seventh Circuit held that a mortgage field servicing company's actions were too attenuated from its mortgage servicer client's own-debt collection efforts to be considered a debt collector under the federal Fair Debt Collection Practices Act ("FDCPA").

 

Accordingly, the Seventh Circuit affirmed the ruling of the trial court granting the company's motion for summary judgment.

 

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

 

The plaintiff homeowners ("Plaintiffs") owned property that was subject to an FHA-insured mortgage loan serviced by a mortgage loan servicer ("Servicer").  Plaintiffs defaulted on their mortgage loan.

 

The Servicer contracted with a mortgage field servicing company ("Company") to perform a variety of services on properties with defaulted mortgages, including lawn maintenance and winterization services.  Additionally, the Servicer arranged with the Company to assist it in complying with certain Department of Housing and Urban Development ("HUD") regulations to which its properties with FHA-insured mortgages were subject. 

 

Specifically, the Servicer contracted with the Company to perform "contact attempt inspections" where a Company representative would visit the property to determine its occupancy status and place a door hanger on an outside doorknob of the property.  The door hanger requested that the person call the Servicer at the number provided, and stated to "please be ready to give your account number," and "we are expecting your call today."  The number listed was for the Servicer.

 

When the Servicer was unable to contact the Plaintiffs about their delinquent payments, it arranged with the Company to perform a series of such contact attempt inspections at the property.  During each of the inspections, the Company representative left the Servicer's door hanger on the Plaintiffs' door. 

 

On at least one occasion, one of the Plaintiffs encountered a Company representative, who did not identify himself as being employed by the Company or anyone else, and told the plaintiff he was "[j]ust doing [his] job." 

 

Plaintiffs stated that they called the number on the door hanger and it took them right to the Servicer.

 

Plaintiffs filed a lawsuit alleging the Company violated the FDCPA by not including the initial disclosure requirements of 15 U.S.C. § 1692g.  Plaintiffs also alleged that the Company violated section 1692e(11), which requires debt collectors to disclose in their initial communications that they are communicating with the debtor in an attempt to collect a debt.

 

The Company moved to dismiss arguing that it was not a "debt collector" within the meaning of the FDCPA.  The trial court denied the motion to dismiss.

 

The case proceeded through discovery and the parties filed cross-motions for summary judgment.  Based on the record evidence, the trial court held that the Company was not a debt collector and therefore not subject to the FDCPA's requirements.  It therefore granted its motion for summary judgment.  Plaintiffs then appealed.

 

On appeal, the Seventh Circuit first examined the language of the FDCPA, noting that its "substantive provisions apply only to debt collectors," and "only to communications made 'in connection with the collection of any debt.'"

 

The Court explained that there are two categories of debt collectors: (1) "those whose 'principal purpose . . . is the collection of any debts,'" and (2) "those who regularly collect[] or attempt[] to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.'"

 

"Here, the parties appropriately focus on whether [the Company's] contact attempt inspections are 'indirect' debt collection services under the second prong." 

 

In ruling that the Company was not a debt collector, the Seventh Circuit held: "we cannot say that [the Company] engages in direct debt collection simply by leaving a door hanger that asks the homeowner to call [the Servicer]." 

 

Moreover, the Court determined that the Company was not an indirect debt collector, which it noted was "consistent with our interpretation of a separate, threshold requirement . . . that the communication being made was 'in connection with' debt collection."

 

The Seventh Circuit explained that it had not established a "bright-line rule" for determining whether a communication was made in connection with debt collection, but instead "described it as a 'commonsense inquiry' consisting of several factors, none of which is dispositive."

 

The factors include whether the communication includes a demand for payment, the nature of the parties' relationship, and the purpose and context of the communication judged by an objective standard.

In analyzing these factors, the Court noted that the door hangers did not make a demand for payment, and only provided the Servicer's name and phone number.  Further, they contained no offers of debt settlement or for payment options.  Thus, the Court concluded that the "door hangers are left in connection with property preservation, not debt collection." 

 

Because the Company was "so far removed from [the Servicer's] actual debt-collection process . . . it cannot be said to have engaged in debt collection, even indirectly, under § 1692a(6)."  Instead, "[t]he principal purpose of the contact inspection is to assist [the Servicer] in its FHA property preservation efforts, not its debt-collection efforts."

 

However, the Court cautioned that "what constitutes 'indirect' debt collection will have to be determined on a case-by-case basis until the case law produces a more robust understanding of that concept."  Further, "[o]ur holding today is limited to the situation before us, a situation that implicates none of the concerns articulated by Congress in enacting the statute."

 

 

 

 

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

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments