FYI: FDIC Issues Final Rule to Fix Madden and Affirm the "Valid When Made" Doctrine

The Federal Deposit Insurance Corporation (FDIC) recently issued its Final Rule clarifying the "Permissible Interest on Transferred Loans".

 

The FDIC's Final Rule follows the issuance of a similar Final Rule by the Office of the Comptroller of the Currency (OCC) on almost the same subjects, as we previously reported.

 

A copy of the Federal Register Notice is available at:  Link to Notice 

 

 

Effective Date:

 

The FDIC states that its Final Rule applies to all insured State-chartered banks and insured branches of foreign banks (State Banks), and will take effect 30 days after publication in the Federal Register, which is expected imminently.

 

 

The Final Rule:

 

The FDIC summarizes that its Final Rule and related regulations provide that:

 

-  "[W]hether interest on a loan is permissible under [federal law] is determined at the time the loan is made"; and

 

-  "[I]nterest on a loan permissible under [federal law] is not affected by a change in State law, a change in the relevant commercial paper rate, or the sale, assignment, or other transfer of the loan."

 

 

Background:

 

As you may recall, at least in States that did not opt out pursuant to 12 U.S.C. 1831d note, federal law in part allows State Banks to charge interest at the "most favored lender" rate -- i.e., the maximum rate permitted to any state-chartered or licensed lending institution in the state where the bank is located.

 

In addition, federal law also provides that the laws of a host State apply to branches of interstate State Banks to the same extent such State laws apply to a branch of an interstate national bank.  As the FDIC summarized, "[i]f laws of the host State are inapplicable to a branch of an interstate national bank, they are equally inapplicable to a branch of an interstate State bank."

 

However, as we reported in our prior update, the U.S. Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC, 786 F.3d 246 (2nd Cir. 2015), essentially held that loans that are completely legal when made by a bank subsequently become illegal if the bank sells or assigns them to a non-bank purchaser or assignee.

 

According to the Second Circuit, the federal banking laws only preempt state usury laws as long as the loan remains in the hands of a bank, but not if the loan is subsequently sold or assigned to an entity that is not a bank or a person collecting interest for a bank.

 

This meant that the loan purchaser defendant in the Madden case, which was not a bank or a person collecting interest for a bank, violated the federal Fair Debt Collection Practices Act by charging illegal interest on the loans it purchased from banks.

 

The Supreme Court of the United States subsequently denied the defendant's petition for a writ of certiorari in June of 2016.  This essentially allowed the Madden ruling to stay in effect.

 

Under the FDIC's Final Rule, interest on a loan permissible under federal law does not become impermissible due to "the sale, assignment, or other transfer of the loan."

 

 

Some Points of Note:

 

In its discussion of the Final Rule, the FDIC states that:

 

-  Its Final Rule does "not exempt State banks or non-banks from State laws and regulations."

 

-  Its Final Rule "does not purport to allow State Banks to assign the ability to preempt State law interest rate limits" under federal law.  Rather, its Final Rule merely allows State Banks "to assign loans at their contractual interest rates.  This is not the same as assigning the authority to preempt State law interest rate limits.  For example, the proposed rule would not authorize a [non-bank] assignee to renegotiate the interest rate of a loan to an amount exceeding the contractual rate, even though the assigning bank may have been able to charge interest at such a rate."

 

-  Its Final Rule is not intended to address whether and when a State Bank "is a real party in interest with respect to a loan or has an economic interest in the loan under state law, e.g., which entity is the true lender."

 

-  If a State opted out pursuant to 12 U.S.C. 1831d note, State Banks "making loans in that State could not charge interest at a rate exceeding the limit set by the State's laws, even if the law of the State where the State bank is located would permit a higher rate."

 

-   "[T]he sale, assignment, or transfer of a partial interest in a loan would fall within the scope of proposed section 331.4(e), and the loan's interest rate terms would continue to be enforceable following such a transaction, and has made a clarifying change to the regulatory text to ensure there is no ambiguity."

 

-   "[A]ll price terms (including fees) on State Banks' loans under [federal law] remain valid upon sale, transfer, or assignment," and "fees that are permitted under the law of the State where the State Bank is located would remain enforceable following the sale, transfer, or assignment of a State Bank's loan."

 

 

 

 

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.

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 

 

FYI: Cal App (4th Dist) Allows CCRAA Plaintiff to Inquire Into Acceptance Rates of "Firm Offer of Credit" Campaigns

The Court of Appeal for the State of California, Fourth Appellate District, recently held that a trial court improperly denied a consumer's motion to compel an answer to the consumer's special interrogatory, as the interrogatory was relevant to create a reasonable inference which would have defeated a lender's motion for summary judgment.

 

More specifically, in this action for alleged violation of the "firm offer of credit" provisions of the California Consumer Reporting Agencies Act (CCRAA), the consumer plaintiff propounded a special interrogatory asking the defendant lenders how many of the consumers who were mailed offers were actually given loans. 

 

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

 

The defendant lenders, through a marketing and solicitation vendor, requested a broad list of anonymous consumers who met certain loan criteria from a credit reporting agency.  After the lenders screened the initial list, the credit reporting agency sent a second narrower list which included the consumers' personal and credit information. The lenders used this information to mail loan offers to the targeted consumers.

 

One of the consumers who received a mailing filed a lawsuit alleging the lenders' actions violated the California Consumer Reporting Agencies Act (CCRAA). (See § 1785.1 et seq.)

 

As you recall, the California Consumer Reporting Agencies Act provides procedures and prohibitions when accessing consumer information. Specifically, the CCRAA provides that, "[w]ithout a consumer's consent, a potential lender may only access or obtain data from a consumer credit report when the expected credit transaction 'involves a firm offer of credit to the consumer.'" (§ 1785.11, subd. (b).) A "firm offer of credit" is statutorily defined as "any offer of credit to a consumer that will be honored if, based on information in a consumer credit report on the consumer and other information bearing on the creditworthiness of the consumer, the consumer is determined to meet the criteria used to select the consumer for the offer." (§ 1785.3, subd. (h).)

 

During consumer's lawsuit she filed a motion to compel a response to her special interrogatory asking the defendant lenders how many of the consumers who were mailed offers were actually given loans. The trial court denied the motion because it "is beyond the scope of relevant discovery (overbroad) as it does not pertain to the issue of whether a 'firm offer of credit' was extended to [consumer]."

 

Thereafter, the defendant lenders filed a motion for summary judgment. The trial court found that "it is undisputed that [the lenders] mailed offers of credit to [consumer] as a result of the soft inquir[ies] . . . made on [consumer's] credit. . . . Additionally, it is undisputed the offers of credit 'contained a minimum loan amount, the range of potential interest rates, and an explanation of repayment terms.' . . . The only reference to a possible denial of credit included within the offers, referred specifically to circumstances where [consumer] no long met the standards used to send out the offer."

 

The trial court ruled "the evidence offered to dispute the instant motion for summary judgment is speculative and insufficient to support a finding" in the consumer's favor, and granted the lenders' motion for summary judgment.

 

Consumer appealed arguing the trial court erred in granting the lenders' motion for summary judgment, in part based on its discovery ruling.

 

The Appellate Court first explained that in reviewing a motion for summary judgment "[t]he moving party bears the initial burden to make a prima facie showing that no triable issue of material fact exists. (Aguilar, supra, 25 Cal.4th at p. 843.) If this burden is met, the party opposing the motion bears the burden of showing the existence of disputed facts. (Ibid.) Courts "'construe the moving party's affidavits strictly, construe the opponent's affidavits liberally, and resolve doubts about the propriety of granting the motion in favor of the party opposing it.'" (Seo v. All-Makes Overhead Doors (2002) 97 Cal.App.4th 1193, 1201-1202, italics added.)

 

The Appellate Court next examined the California Consumer Reporting Agencies Act, noting that "[t]o determine whether the offer of credit comports with the statutory definition, a court must consider the entire offer and the effect of all the material conditions that comprise the credit product in question. If, after examining the entire context, the court determines that the 'offer' was a guise for solicitation rather than a legitimate credit product, the communication cannot be considered a firm offer of credit." (Cole v. U.S. Capital Inc. (7th Cir. 2004) 389 F.3d 719, 727-728 (Cole).)4 "To decide whether [a lender] has adhered to the statute, a court need only determine whether the four corners of the offer satisfy the statutory definition (as elaborated in Cole), and whether the terms are honored when consumers accept." (Murray v. GMAC Mortg. Corp. (7th Cir. 2006) 434 F.3d 948, 956 (Murray), italics added.)

 

The Appellate Court identified the triable issue of material fact as the second part of the test for a "firm offer of credit" -- the lenders' intent.  The lenders' intent involved a determination of whether the lenders would have honored the proposed loan terms had consumer accepted them, in other words, whether the lenders' mailings were legitimate credit products, or merely guises for solicitation.

 

The lenders asserted, supported by the affidavits of the lender's marketing vendor, that each prescreening inquiry into consumers credit was done for the sole purpose of extending a firm offer of credit.

 

Consumer responded that "[the lenders] did not provide a declaration from anyone . . . who expressly stated that all qualified acceptances would have been honored. In fact, there is no declaration from anyone . . . stating whether the lenders actually did grant loans or intended to grant loans to all qualified recipients who accepted the offer."

 

Consumer supported her argument by pointing out that a jury is instructed: "You may consider the ability of each party to provide evidence. If a party provided weaker evidence when it could have provided stronger evidence, you may distrust the weaker evidence."

 

Furthermore, based on the hundreds of thousands of loan offers that the lenders mailed to consumers: "Several inferences arise from these facts. Maybe [the lenders] knew the response rate would be extremely low and they would be able to fund loans to all 'takers.' But a contrary inference is that [the lenders] intended to use the credit pulls to identify many suitable candidates for loans while only extending loans to the 'cream of the crop' of the responders." (See Veera v. Banana Republic, LLC (2016) 6 Cal.App.5th 907, 921 ["'"bait and switch" is a form of false advertising in which advertisements may not be bona fide because what the merchant intends to sell is significantly different from that which drew the potential customer in'"].)

 

The lenders argued "it was incumbent on [consumer] to offer some evidence to show that either (1) she applied for a loan from [the lenders] after receiving their offers of credit and was denied a loan despite meeting [the lenders'] credit criteria, or (2) she responded to [the lenders'] offers of credit and was diverted into some other . . . business dealing (e.g., not a personal loan)."

 

 

The Appellate Court agreed with the consumer, acknowledging that consumer's disputed interrogatory would have provided relevant evidence that may have tended to prove (or disprove) her cause of action.

 

In so ruling, the Court noted that "'[r]elevant evidence' means evidence, including evidence relevant to the credibility of a witness . . . , having any tendency in reason to prove or disprove any disputed fact that is of consequence to the determination of the action." (Evid. Code, § 210.) Generally, a party's intent is proven by circumstantial evidence. (Locke v. Warner Bros., Inc. (1997) 57 Cal.App.4th 354, 368.)

 

Here, the Appellate Court held that the lenders did not meet their initial burden as "it is arguably a reasonable inference that the lenders intended to honor the advertised loans if the consumers had accepted the proposed loan terms. But given the hundreds of thousands of mailed loan offers, and the complete absence of evidence regarding whether any of the loan offers were actually honored (compounded by the court's erroneous discovery ruling), it is also a reasonable inference that the thousands of loan offers were not, in fact, firm offers of credit."

 

The Appellate Court recited that when there is a reasonable inference that is contradicted by another reasonable inference, the motion for summary judgment "shall not be granted."  Accordingly, the trial court's judgment was reversed.

 

 

 

 

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.

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 

 

FYI: Fed Cir Holds Lender's Claims Against Ginnie Mae Barred by Res Judicata

The U.S. Court of Appeals for the Federal Circuit recently dismissed a lawsuit brought by a mortgage lender against the Government National Mortgage Association ("Ginnie Mae") alleging that Ginnie Mae violated several guaranty agreements.

 

In so ruling, the Court held that the lender's breach of contract claims were barred by the doctrine of res judicata, due to a Consent Agreement and related judgment between the lender and the U.S. Securities and Exchange Commission ("SEC").

 

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

 

The plaintiff originated and serviced residential mortgages and issued mortgage-backed securities in Ginnie Mae's mortgage-backed securities (MBS) program. As part of the MBS program, the plaintiff lender and Ginnie Mae entered into many Guaranty Agreements.

 

Ginnie Mae's "Issuer Guide" was incorporated into the Guaranty Agreements.  The Issuer Guide and Guaranty Agreements required, inter alia, that plaintiff establish a custodial account for principal and interest payments and also required that delinquency rates be kept below certain threshold levels.

 

In 2015, Ginnie Mae "undertook a compliance review" of plaintiff's portfolio and subsequently "served [plaintiff] with a Notice of Violation, stating that, during the compliance review, Ginnie Mae had 'observed numerous instances where borrower payments were not moved to Ginnie Mae custodial accounts within [forty eight] hours of receipt' and had found that [plaintiff] has 'submitted false reports to Ginnie Mae'" stating that mortgages were delinquent 90 days or more when plaintiff repurchased them pursuant to the Guaranty Agreements "when, in fact, the 'loans were not properly delinquent,' both in breach of the Guaranty Agreements."

 

Ginnie Mae did not immediately exercise its right under the Guaranty Agreements to terminate the plaintiff from further participation in the MBS program, but reserved the right to do so.

 

The plaintiff lender responded to the Notice of Violation and promised to comply with Ginnie Mae's requirements, but also noted that it was under investigation by the SEC for the same conduct.

 

Based on further investigation, Ginnie Mae terminated the plaintiff from the MBS program and extinguished "any redemption, equitable, legal or other right, title and interest of [plaintiff] in the mortgages pooled under each and every Guaranty Agreement."

 

In 2016, the SEC filed a civil enforcement action against the plaintiff and its corporate officers, alleging that they misled investors by representing to Ginnie Mae and investors "that certain mortgage loans in [plaintiff's] securities were delinquent when, in fact, such loans were current … [and] that [plaintiff] had violated the Guaranty Agreements by 'improperly exercise[ing]' its repurchase option on loans."

 

The plaintiff lender allegedly did this by delaying the transfer of borrower payments that cured defaults into the custodial account, "falsely pushing the borrower's account into delinquency and eligibility for repurchase." The plaintiff "then applied the delayed payments to bring the loan current and 'back into [its] inventory,' to be re-purchased at par, re-pooled, and re-sold as an MBS 'at market rates, which reflected a premium over par.'"

 

The SEC alleged that the plaintiff lender "accrued '$7.5 million in illicit profits as a result of the practice,' all while [it] was certifying to Ginnie Mae that [it] was in compliance with the Guaranty Agreements."

 

The SEC and the plaintiff lender entered into a Consent Agreement that, without admitting liability, provided for the entry of a final judgment against the plaintiff that required plaintiff to "pay $7.5 million in disgorgement, approximately $500,000 in prejudgment interest, and $3.75 million in civil penalties." The Agreement "provided that it did not 'affect [plaintiff's] right to take legal or factual positions in litigation or other legal proceedings in which the [SEC] is not a party." The trial court approved the Consent Agreement "as its final judgment."

 

The plaintiff lender "tried to bring … breach of contract claims against Ginnie Mae" in the trial court but the court "dismissed these claims under Rule 12(b)(1) of the Federal Rules of Civil Procedure, for lack of subject matter jurisdiction over contract claims against the United States."

 

Two years later, the plaintiff "filed its Complaint in the Court of Federal Claims, alleging that Ginnie Mae had 'breached all of [the] Guaranty Agreements' when it wrongfully terminated [plaintiff] from its MBS program."

 

The Government moved to dismiss the complaint, and the Court of Federal Claims dismissed the complaint, concluding that the "[G]overnment has shown that [plaintiff's] breach of contract claims … are precluded under the doctrine of res judicata, because [the] action is essentially a collateral attack on the [Final] Judgment entered by the [District Court] in the SEC Civil Enforcement Action.'"

 

The Court of Appeals for the Federal Circuit explained that "'[t]he doctrine of res judicata involves the related concepts of claim preclusion and issue preclusion.' … Claim preclusion 'foreclose[s] any litigation of matters that … should have been advanced in an earlier suit.'… 'A final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action.'" "Generally, claim preclusion applies where: '(1) the parties are identical or in privity; (2) the first suit proceeded to a final judgment on the merits; and (3) the second claim is based on the same set of transactional facts as the first.'"

 

The plaintiff lender argued "that the Court of Federal Claims erred in dismissing its Complaint because 'the elements of claim preclusion have not been met.'"  Specifically, the plaintiff lender argued that "the SEC and Ginnie Mae are not in privity," and that its complaint did not "arise from the same set of transactional facts for the purposes of defendant preclusion because [plaintiff's] 'claims are not a collateral attack on the [Final] Judgment.'"

 

The Court of Appeals rejected this argument, explaining that "[f]irst, the SEC and Ginnie Mae are in privity for the purposes of precluding [plaintiff's] breach of contract claims. 'There is privity between officers of the same government,' for the purposes of claim preclusion, if 'in the earlier litigation the representative of the United States had authority to represent its interests in a final adjudication of the issue in controversy.'"

 

The Court noted that, as it was "uncontested that the SEC and Ginnie Mae are both officers and representatives of the United States", the "SEC has the authority to represent the United States in civil enforcement actions," the SEC "has the authority to represent the United States in settlements resolving those civil enforcement actions", and therefore that the SEC "'represent[ed] the United States' on the 'issue in controversy'— whether [plaintiff] breached the Guaranty Agreements, precipitating Ginnie Mae's extinguishment and termination of [plaintiff's] rights[,]" the Court of Appeals concluded that "the Court of Federal Claims properly concluded that the SEC and Ginnie Mae are in privity for the purposes of claim preclusion."

 

Second, the Court of Appeals determined that the plaintiff lender's claims "constitute a collateral attack on the Final Judgment." This is because "[a] claim is a 'collateral attack' on a final judgment where 'successful prosecution of the second action would nullify the initial judgment or would impair rights established in the initial action.'"

 

The Court noted that the plaintiff lender's complaint sought "to dispute the facts laid out in the SEC District Court Complaint and, thereby, 'impair rights established' by, if not 'nullify,' the Consent Agreement and Final Judgment."  The Court also noted that a "defendant that could have been interposed cannot later be used to attach the judgment of the first action.'"  Accordingly, the Court of Appeals held that the plaintiff lender's complaint "was a collateral attack on the Final Judgment."

 

The Court of Appeals rejected the plaintiff's remaining arguments as unpersuasive, and affirmed the judgment of the U.S. Court of Federal Claims.

 

 

 

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.

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 

 

FYI: 7th Cir Holds FDCPA Claims Failed Due to No Evidence of "Confusing or Misleading to Significant Fraction of Population"

The U.S. Court of Appeals for the Seventh Circuit recently affirmed entry of summary judgment in favor of a debt collector that its collection letter language was "false, misleading or deceptive," in violation of section 1692e of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. ("FDCPA").

 

In so ruling, the Seventh Circuit concluded that, although the language at issue in the collections letter was neither "plainly and clearly not misleading" nor "plainly false, deceptive or misleading" on its face, but could be construed so by the unsophisticated consumer, but summary judgment in the debt collector's favor was appropriate as a result of the debtor's failure to present evidence that the language in question would be confusing or misleading to a significant fraction of the population, as required.

 

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

 

A third-party debt collector ("Debt Collector") mailed three dunning letters to the debtor ("Debtor") dated March 8, 2016 (which the Debtor claims to have never received), and two nearly identical letters dated April 21, 2016 and June 6, 2016, attempting to collect on delinquent call phone bills.

 

The April 21, 2016 letter that formed the basis of this lawsuit (the "Collections Letter") identified the cell phone provider as the creditor and offered three payment options to satisfy the outstanding debt.  The Collections Letter further included language informing the Debtor that "This letter serves as notification that your delinquent account may be reported to the national credit bureaus," followed by the statement that "[p]ayment of the offered settlement amount will stop collection activity on this matter."

 

The Debtor filed suit against the Debt Collector alleging that the Collections Letter violated section 1692e of the FDCPA, which prohibits debt collectors from using "any false, deceptive, or misleading representation or means in connection with the collection of any debt."

 

The Debt Collector's motion to dismiss was denied on the grounds that determination of whether a communication is confusing or misleading under § 1692e is ordinarily a question of fact.  After class certification and cross‐motions for summary judgment were filed, summary judgment was entered in the Debt Collector's favor based upon the Debtor's failure to adduce necessary evidence that the language in question would be confusing or misleading to a significant fraction of the population.  

 

The Debtor appealed the summary judgment rulings and the Debt Collector cross-appealed, claiming that the trial court erred in denying its motion to dismiss the complaint for failure to state a claim.

 

The Seventh Circuit first addressed the Debt Collector's cross-appeal of the trial court's order denying its motion to dismiss, initially collecting cases upholding the proposition that complaints alleging misleading communications under section 1692e are rarely subject to dismissal for failure to state a claim in the Seventh Circuit because whether a communication is false, deceptive or misleading under the FDCPA is a question of fact.   See Evory v. RJM Acquisitions Funding, L.L.C., 505 F.3d 769, 776 (7th Cir. 2007) ("[W]e treat issues of deception as ones of fact rather than of law."); Zemeckis v. Glob. Credit & Collection Corp., 679 F.3d 632, 636 (7th Cir. 2012) ("As a general matter, we view the confusing nature of a dunning letter as a question of fact that, if well‐pleaded, avoids dismissal on a Rule 12(b)(6) motion.") (internal citation omitted); McMillan v. Collection Prof'ls Inc., 455 F.3d 754, 760 (7th Cir. 2006) (noting that inquiries under § 1692e "are necessarily fact bound" and that in "most instances" application of Rule 12(b)(6) "will require that the plaintiff be given an opportunity to demonstrate that his allegations are supported by a factual basis responsive to the statutory standard"). 

 

However, dismissal of a claim under §1692e is appropriate when it is clear from the face of the communication that no reasonable person, however unsophisticated, would be deceived by the allegedly false or misleading statement. See Heredia, 942 F.3d at 814; Taylor v. Cavalry Inv., L.L.C., 365 F.3d 572, 574–75 (7th Cir. 2004) ("If it is apparent from a reading of the letter that not even 'a significant fraction of the population' would be misled by it… the court should reject it without requiring evidence beyond the letter itself.").

 

Here, the Seventh Circuit rejected the Debt Collector's argument that the Collection Letter's disputed language was not misleading because it tracks safe harbor model language found in Regulation V, which governs the Fair Credit Reporting Act (12 C.F.R. Part 1022, App. B, Model Notices of Furnishing Negative Information, Model Notice B‐1), holding that use of the model language does not eliminate the factual question of whether the Debtor stated a claim under the FDCPA. 

 

The Court further agreed that the Debtor's interpretation of the Collection Letter's statements following the settlement offers that delinquent account "may be reported" to credit bureaus, but "[p]ayment of the offered settlement amount will stop collection activity on this matter," stated a cause of action under section 1692e, and that the Debtor did not argue that she believed payment of the settlement offer could prevent any collection activity, as the Debt Collector suggests.  Accordingly, the order denying the Debt Collector's Rule 12(b)(6) motion to dismiss was affirmed.

 

Turning to the Debtor's argument that summary judgment in the Debt Collector's favor was improper, the Seventh Circuit was tasked with determining whether the Collection Letter was deceptive from the objective standpoint of an "unsophisticated debtor" — one who is "uninformed, naive," and "trusting," but does possess "rudimentary knowledge about the financial world," and "is wise enough to read collection notices with added care." Boucher v. Fin. System of Green Bay, Inc., 880 F.3d 362, 366 (7th Cir. 2018) (quoting Williams v. OSI Educ. Servs., Inc., 505 F.3d 675, 678 (7th Cir. 2007) (citations and internal quotations omitted)).

 

Applying this standard, the Seventh Circuit has categorized §1692e cases into three groups to determine whether the disputed language "could well confuse a substantial number of recipients" (Pantoja v. Portfolio Recovery Assoc., LLC, 852 F.3d 679, 686 (7th Cir. 2017)):

 

(1) cases where the challenged language is obviously not misleading and no extrinsic evidence is required to demonstrate that a reasonable unsophisticated consumer would not be misled. (*Id. at 686–87.);

 

(2) cases where the debt collection language is not deceptive or misleading on its face, but could be construed so as to be confusing or misleading to the unsophisticated consumer, requiring plaintiffs to produce extrinsic evidence, such as consumer surveys, tending to show that unsophisticated consumers are in fact confused or misled by the challenged language. (Id.), and;

 

(3) cases involving language that is plainly false, deceptive, or misleading, and therefore requires no additional evidence for the plaintiff to succeed on her claim. (Id.).

 

The Debtor took the position that no additional evidence was required beyond her own opinion that a reasonable but unsophisticated consumer would deem the Collection Letter as a "threat to engage in credit reporting" unless payment was made by the date listed with the first settlement offer.  However, the Court disagreed with the Debtor's claim that the phrase "may be reported to the national credit bureaus" conveyed a future possibility that her debt could be reported when, in fact, it already had been reported at the time the letter was generated (or shortly thereafter).  The Seventh Circuit reasoned that "may" could refer to future events, as the Debt Collector argued and by definition, but by definition, could also be intended to notify the Debtor that the Debt Collector is capable of reporting the outstanding debt. 

 

Thus, the Collections Letter did not fall into the first category as so "plainly and clearly not misleading," nor the third category involving plainly false, deceptive or misleading language, but the second category for which the Debtor bears the burden of  producing evidence of confusion (beyond her own) using an objective measure such as "a carefully designed and conducted consumer survey." Sims v. GC Servs. L.P., 445 F.3d 959, 963 (7th Cir. 2006).

 

The Debtor's reliance on cases from other circuits to support her contention that no further evidence was required when a communication has two possible readings — one of which is misleading — were inapplicable, as each of the cited circuits used the "least sophisticated consumer" standard expressly rejected by the Seventh Circuit to assess whether a communication is confusing under the FDCPA.  See Pettit v. Retrieval Master Creditor Bureau, Inc., 211 F.3d 1057, 1060 (7th Cir. 2000) ("[W]e have rejected the 'least sophisticated debtor' standard used by some other circuits because we don't believe that the unsophisticated debtor standard should be tied to 'the very last rung on the sophistication ladder.'").

 

Without adequate proof that a significant — or any (beyond herself) — fraction would read the Collections Letter as misleading, the Seventh Circuit agreed with the trial court's findings that the Debtor failed to create a genuine issue as to whether a significant fraction of the population would reach such a conclusion.  Lox v. CDA, Ltd., 689 F.3d 818, 821 (7th Cir. 2012) (internal quotation omitted); Pettit, 211 F.3d at 1062. 

 

Accordingly, entry of summary judgment in the Debt Collector's favor and against the Debtor 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.

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