FYI: 7th Cir Reverses Dismissal of FDCPA Claim Involving Statement That 1099C Form May Be Filed

The U.S. Court of Appeals for the Seventh Circuit recently reversed the dismissal of a debtor's claim under the federal Fair Debt Collection Practices Act ("FDCPA"), holding that the debtor stated a plausible claim that the dunning letter she received violated the FDCPA.

 

Here, the Court held that the dunning letter at issue implied that the debt collector would file a 1099C form with the Internal Revenue Service, when in reality it was clear to the Seventh Circuit that the creditor would never file a 1099C form because the amount in each letter was less than $600.

 

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

 

The defendant debt collector sent form letters to debtors offering several payment options involving percentage reductions of the debt if the debtor paid certain amounts by dates certain.

 

Defendant sent 4 dunning letters to the debtor, one of which contained at the end a caveat the setting a debt for less than the total amount owed "may have tax consequences[,]" and the creditor "may file a 1099C form."

 

The debtor sued, alleging the "1099C clause" violated sections 1692e and 1692f of the FDCPA. As you may recall, section 1692e prohibits debt collectors from using "false, deceptive, or misleading misrepresentation[s] or means in connection with the collection of a debt. … And under section 1692f, a debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt."

 

In determining whether the language of a collection letter is false, deceptive or misleading, the Seventh Circuit "view[s] the disputed language from the objective point of view of an 'unsophisticated debtor.'

 

The Seventh Circuit began its analysis by noting that "[g]enerally, the question of whether a disputed statement is false, deceptive, or misleading is a fact-laden one and therefore a [trial] court may not dismiss a complaint unless the disputed statement is plainly, on its face, not misleading or deceptive."

 

The Court also noted that it had recently decided in Dunbar v. Kohn Law Firm S.C., which involved a similar "tax consequences clause" that stated, "NOTICE: This settlement may have tax consequences[,]" that the clause did not violate the FDCPA because it "is literally true and not misleading under the objective 'unsophisticated consumer' test[.]'"

 

However, the Seventh Circuit ruled that the 1099C clause here was a different matter because whether a 1099C form is filed or not "is information within the knowledge of the creditor. … Only the debtor knows whether, given her financial situation as a whole, she will have to pay taxes on the forgiven debt. The creditor, however, knows whether it will have to file a 1099C form or not … [because] [t]he Internal Revenue Service requires a creditor to file a 1099C form if it has forgiven at least $600 in principal."

 

Thus, the Court reasoned, the creditor "knows for certain whether it is offering to forgive more or less than $600 in principal", but "[t]he debtor, on the other hand, may have a difficult time determining how much she owes in principal versus interest, as the dunning letter may not identify the amount of each."

 

In addition, the Seventh Circuit explained, the language of the 1009C clause "is misleading in a material way because the reference to a report to the IRS may instill angst in the unsophisticated debtor."

 

Because, on a motion to dismiss, the Court "must accept as true all well-pleaded allegations and draw all reasonable inferences in favor of the plaintiff[,]" and because as to the 1099C clause it was clear to the Seventh Circuit that the creditor would never file a 1099C form because the amount in each offer was less than $600, the Seventh Circuit concluded that the plaintiff "plausibly alleged" that the "statement that [the creditor] might file a 1099C form is misleading" and reversed and remanded the case to the trial court 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: Feds Encourage "Responsible" Use of Alternative Data

The federal banking regulators and the CFPB recently issued an "Interagency Statement on the Use of Alternative Data in Credit Underwriting", stating in sum that the agencies "encourage responsible use" of alternative data, especially in the context of credit underwriting.

 

A copy of the Interagency Statement is available at:  Link to Interagency Statement

 

As you may recall, the CFPB previously addressed "alternative data" in February of 2017.  In the CFPB's prior publication, and in this Interagency Statement, "alternative data" refers to "information not typically found in the consumer's credit files of the nationwide consumer reporting agencies or customarily provided by consumers as part of applications for credit."

 

For example, "alternative data" would include the automated use of "cash flow data to better evaluate borrowers' ability to repay loans".  This data is usually verified by bank account or similar records, and can "demonstrate reliable income patterns over time from a variety of sources rather than a single job".

 

The Consumer Financial Protection Bureau, together with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration

and the Office of the Comptroller of the Currency, noted that many of their regulated entities "are either using or contemplating" using a "broad range of alternative data" for purposes of "credit underwriting, as well as in fraud detection, marketing, pricing, servicing, and account management."

 

In encouraging the "responsible" use of alternative data, the federal agencies note that:

 

-  Entities using this data must comply with "applicable consumer protection laws, [such as] fair lending laws, prohibitions against unfair, deceptive, or abusive acts or practices, and the Fair Credit Reporting Act."

 

-  Entities should conduct "thorough analysis of relevant consumer protection laws and regulations to ensure firms understand the opportunities, risks and compliance requirements before using alternative data," and that "data that present greater consumer protection risks warrant" additional "appropriate testing, monitoring and controls to ensure consumer protection risks are understood and addressed."

 

-  Depository institutions should "ensure that alternative data usage comports with safe and sound operations", including "rigorous assessment of the quality and suitability of data to support prudent banking operations.

 

-  Depository institutions should also look to "the federal banking agencies' model risk management guidance contains principles for managing risk related to models, including those that may leverage alternative data."

 

 

 

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: 8th Cir Holds No Repurchase Required for Foreclosed Loans

The U.S. Court of Appeals for the Eighth Circuit held that the purchaser of residential mortgage loans could not require the seller of the loans to repurchase purportedly defective loans under their agreement after the loans had gone through foreclosure.  However, the seller was required to repurchase the defective loans that had not gone through foreclosure. 

 

Accordingly, the Eighth Circuit affirmed the affirmed the ruling of the trial court granting summary judgment in part to the seller and in part to the purchaser.

 

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

 

Over the course of years, a company ("Purchaser") purchased hundreds of residential mortgage loans from a bank ("Seller").  Rather than negotiate a new deal each time, the parties entered into one overarching contract (the "Agreement"). 

 

The Agreement generally placed the risk of loss on the Seller by requiring it to abide by a long list of representations and warranties, and granting the Purchaser the "sole and exclusive discretion" to identify defects in loans, an giving the Purchaser significant rights if it did.

 

With respect to twelve of the loans, the Purchaser notified the Seller of defects in writing, and informed the Seller that it needed to take action under the Agreement's "cure-or-repurchase" provision.

 

The "cure-or-repurchase" provision of the Agreement obligated the Seller to "correct or cure [the] defect within the time prescribed by [the Purchaser] to the full and complete satisfaction of [the Purchaser]," and if the Seller was unable to correct or cure the defect within the prescribed time, the Seller was required to either "repurchase such defective Loan from [the Purchaser] at the price required by [the Purchaser]," or "agree to such other remedies . . . as [the Purchaser] deem[ed] appropriate."

 

By the time the Purchaser demanded that the Seller buy back six of the loans, the mortgages securing them had already been through foreclosure.

 

When the Seller refused to act, the Purchaser sued.  Both sides requested summary judgment, and the magistrate analyzed the loans differently based on whether foreclosure had occurred.  For the six in which it had not, the judge ruled that the Seller breached the Agreement.  For the other six, the judge determined that the Seller owed nothing to the Purchaser.  Both parties appealed.

 

On appeal, the Eighth Circuit first noted that the Agreement contained a Missouri choice-of-law provision, and therefore Missouri law applied to the interpretation of the Agreement.  The Court then explained that its "task is to interpret the Agreement by examining 'the plain and ordinary meaning of the language used' to determine the parties' obligations, both for the loans that had gone through foreclosure and those that had not."

 

With respect to the loans that had not gone through foreclosure, the Seller argued that because the Purchaser's letters never specified the repurchase prices of any of the loans, which it characterized as a condition precedent to its own performance, it was not required to act.

 

The Eighth Circuit disagreed, ruling that although the Purchaser's letters omitted the repurchase prices, "[t]he cure-or-repurchase provision did not contain any language suggesting that inclusion of the repurchase price was necessary to trigger the [Seller's] obligation to perform."  Thus, the Seller "had to hold up its end of the bargain."

 

The Seller next argued that the Purchaser delayed too long before acting, first by waiting before demanding that the Seller repurchase the loans and later by failing to sue in a timely fashion.

 

The Eighth Circuit again disagreed, noting that although the Purchaser waited more than two years in some cases to demand action from the Seller, "nothing in the Agreement required it to act any sooner."

 

Further, although in the face of silence courts will sometimes presume that an option or a right "must be exercised within a reasonable time," they must also be "leery of imposing time limits" when there is evidence that the "parties to the contract bargained" against them. 

 

The Eighth Circuit determined that the Agreement suggested that the parties bargained against a reasonable time limitation, because the Purchaser was assigned the "sole and exclusive discretion" to determine whether a loan was defective, the Agreement contained a provision stating that the failure of either party to exercise a contractual right did not constitute a waiver, and that Agreement stated that the Purchaser had the right to review or fail to review the loan documentation without affecting its right to demand repurchase.

 

The Seller further argued that the lawsuit was filed too late under Missouri's five-year statute of limitations.  The Eighth Circuit explained that the argument turned on when the Purchaser's claims accrued, as the record showed it sued within five years of the Seller refusing to repurchase the loans.  The Purchaser argued that it did not suffer an "actual loss" until the Seller refused the repurchase, but the Seller argued that the Purchaser suffered a loss as soon as it purchased the defective loans.    

 

The Court sided with the Purchaser, ruling that "only when [the Seller] refused to fulfill its repurchase obligation and make things right did [the Purchaser] suffer an 'actual loss.'"

Turning to the six loans that had gone through foreclosure, the Eighth Circuit stated that "[the Purchaser has not explained what, exactly, [the Seller] was supposed to repurchase."

 

The Court observed that sometimes residential-mortgage loans cease to exist following a foreclosure by operation of state law, or through discharge in federal bankruptcy proceedings.  Thus, "without evidence of what, if anything, remained of the underlying loans, we are left guessing about whether [the Seller] breached by failing to fulfill its repurchase obligation."

 

The Purchaser argued that it did not matter if the loans still existed, because it was entitled to money damages either way.  However, the Eighth Circuit explained that the Purchaser's argument "conflates the two distinct remedies available under the cure-or-repurchase provision," which were to repurchase the loan, or other remedies (including indemnification or refund). 

The Eighth Circuit stated that the Purchaser's "current theory that it was entitled to compensation no matter what was left of the loans fits in the second category, not the first," but the Purchaser "has always claimed that [the Seller] breached because it failed to 'comply with its repurchase obligations,' which falls in the first category."

 

Thus, the Eighth Circuit held, the Purchaser's "current theory is inconsistent with the remedy it has sought all along."

 

Accordingly, the ruling of the trial court was affirmed.

 

 

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   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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.

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and

 

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