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SCOTUS Protects Lawyers Seeking Non-Judicial Foreclosures

Editor’s Note: BCLP’s consumer financial services team is a group of specialized lawyers from around the U.S., adept in state court rumbles, courthouse steps foreclosures, and bankruptcy court interludes. They are also deep thinkers in consumer law, and were waiting for this ruling today. If you have a portfolio of consumer loans and want some efficient, value-maximizing handling, give us a call. Here’s the take from Zina Gabsi, from our Miami CFS practice.

Earlier today, the U.S. Supreme Court issued its long-awaited opinion on whether law firms pursing non-judicial foreclosures are “debt collectors” as defined by the Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. §1692 et seq. Obduskey v. McCarthy & Holthus LLP, Case No. 17-1307 (March 20, 2019). In its ruling, the Court held that a business engaged in no more than a non-judicial foreclosure is not a debt collector under the FDCPA. (Business lawyers around the US breathed a collective sigh of relief.) Instead, the Court held that those pursuing non-judicial foreclosures are subject to the more limited FDCPA restrictions contained in section 1692f(6).

The FDCPA defines a debt collector as “any person … in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or asserted to be owed or due another.” 15 U.S.C. §1692a(6). But the statute also includes the “limited-purpose definition” which states that “[f]or the purpose of section 1692f(6) [the] term [debt collector] also includes any person … in any business the principal purpose of which is the enforcement of security interests.” Thus, the statute creates a set (debt collectors) and a subset (people that only seek to enforce security interests). The subset certainly includes “repo men,” but according to the Supreme Court, the subset also includes lawyers pursuing non-judicial foreclosures. The subset is subject to far less restrictions and mandates under the FDCPA.

The Court considered three factors in coming to its conclusion: (i) the text of the FDCPA itself; (ii) Congress’s intent; and (iii) the FDCPA’s legislative history. The Court explained that but for the limited-purpose definition (the subset), those pursuing non-judicial foreclosure would in fact be debt collectors under the additional provisions of the FDCPA. However, the Court notes that a plain reading of the limited-purpose definition, “particularly the word ‘also,’ strongly suggests that one who does no more than enforce security interests does not fall within the scope of the general definition. Otherwise why add this sentence at all?” Obduskey, at page 8. To interpret the definition of a debt collector under the FDCPA otherwise would render the addition of the “limited-purpose definition” superfluous. Id., at page 9. Furthermore, the Court posited that Congress “may well have chosen to treat security-interest enforcement differently from ordinary debt collection in order to avoid conflicts with state nonjudicial foreclosure schemes.” Id.

Of note, the Court rejected Obduskey’s argument that “McCarthy engaged in more than security-interest enforcement by sending notices that many ordinary homeowner would understand as an attempt to collect a debt backed up by the threat of foreclosure.” Id., at page 13. The Court explained that such notices were likely required under state law in order to pursue the non-judicial foreclosure and therefore the FDCPA’s “(partial) exclusion of ‘the enforcement of security interests’ must also exclude the legal means required to do so.” Id.

Justice Sotomayor wrote a concurring opinion to make two observations: “First, this is a close case, and today’s opinion does not prevent Congress from clarifying this statute if we have gotten it wrong. Second, as the Court makes clear, ‘enforcing a security interest does not grant an actor blanket immunity from the’ mandates of the FDCPA.” She interestingly noted that Congress may not have contemplated the Court’s interpretation because even though States do regulate nonjudicial foreclosures, the FDCPA was enacted “to promote consistent State action to protect consumers against debt collection abuses.”

The holding sheds light (for the moment) on the scope of the limited-purpose exception to the FDCPA’s definition of a debt collector as it relates to nonjudicial foreclosures. “[W]hether those who judicially enforce mortgages fall within the scope of the primary definition is a question we can leave for another day.” Id., at page 12. We will cover that another day too!

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Fair Debt Collection – In Writing, and We Mean It

The Sixth Circuit Court of Appeals continues to contribute to the case law defining which violations of procedural statutes constitute an injury-in-fact under Spokeo, Inc. v. Robins, ––– U.S. ––––, 136 S.Ct. 1540, 1547, 194 L.Ed.2d 635 (2016).

In Macy v GC Services Limited Partnership, it holds that Plaintiffs alleged sufficient concrete harm to satisfy the injury-in-fact requirement for standing where the defendant debt collector’s letter omitted to inform the plaintiffs, credit card holders, that it was obligated to provide certain information only if Plaintiffs disputed their debts in writing. See 2018 WL 3614580 (6th Cir. July 30, 2018).

At issue was the Fair Debt Collection Practices Act’s requirements that a debt collector provide a consumer with a notice that contains:

(4) a statement that if the consumer notifies the debt collector in writing within [a] thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; and (5) a statement that, upon the consumer’s written request within [a] thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.” 15 U.S.C. § 1692g(a) (emphases added).

The Defendant’s letter omitted to mention the writing requirement, instead simply stating, “if you do dispute all or any portion of this debt within 30 days of receiving this letter, we will obtain verification of the debt from our client and send it to you. Or, if within 30 days of receiving this letter you request the name and address of the original creditor, we will provide it to you in the event it differs from our client, Synchrony Bank.”

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Supreme Court to Address Whether Collection of Time-Barred Debts Violate FDCPA

Our colleagues at The Bankruptcy Cave, Bryan Cave’s Bankruptcy & Restructuring Blog, recently published a blog post on the Supreme Court agreeing to to hear the issue of whether a debt collector that buys old, charged off debt which is beyond the statute of limitations violations the Fair Debt Collection practices Act when it files a proof of claim on that debt in a Chapter 13 bankruptcy (which they all do, as no one has an incentive to object to the claim, and they often collect far more on the debt than what they paid).

[On October 11, 2016,] the Supreme Court granted certiorari on an issue that (a) is pretty important in the world of consumer debt collection, and (b) makes some folks pretty darn furious. The issue is this:  if you file a proof of claim in a bankruptcy case, and you know such claim is barred by the applicable statute of limitations, are you committing a “misleading” or “unfair” practice under the Fair Debt Collection Practices Act (FDCPA)?

Read more on The Bankruptcy Cave for further insights on the competing interests at play, and how the Court may ultimately rule.  And if you haven’t seen John Oliver’s take on the practice of buying uncollectible medical debt, the post contains a link to the video.

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Can a Guarantor Waive his Right to a Foreclosure Confirmation Proceeding in Georgia?

Yes.

On Monday, February 22, 2016, in a case closely watched by commercial real estate lenders, borrowers and guarantors, the Supreme Court of Georgia issued its opinion in PNC Bank, N.A.  v. Smith, et al., S15Q1445.  The case was before the Supreme Court on two certified questions from the United States District Court for the Northern District of Georgia.  The two Certified Questions were: (1) Is a lender’s compliance with the requirements contained in OCGA § 44-14-161 a condition precedent to the lender’s ability to pursue a borrower and/or guarantor for a deficiency after a foreclosure has been conducted?; and (2) If so, can borrowers or guarantors waive the condition precedent requirements of such statute by virtue of waiver clauses in the loan documents?

In answering the first question in the affirmative, the Georgia Supreme Court upheld its reasoning in First Nat. Bank & Trust Co. v. Kunes, 230 Ga. 888, 890-91 (1973). The Georgia Supreme Court echoed the reasoning in Kunes by stating “that notice to both sureties and guarantors is necessary to satisfy the purpose of the confirmation statute— ‘to limit and abate deficiency judgments in suits and foreclosure proceedings on debts’ and to enable sureties and guarantors ‘an opportunity to contest the approval of the [foreclosure] sales.”

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Hefty Fine Against Major Bank Reminds Companies Offering Add-On Products that the CFPB Is Watching

The CFPB has issued another enforcement action exceeding the half-billion dollar mark against a large bank for its add-on product offerings. Citibank and its subsidiaries were penalized for alleged deceptive marketing, unfair billing and deceptive debt collection involving its credit card add-on products and services. This marks the tenth public enforcement action that the CFPB has announced for practices associated with marketing or administering add-on products in its four-year history.

As part of the settlement Citi was ordered to pay $700 million in restitution to about 8.8 million consumers who were impacted by the add-on product offerings. The company also must pay the CFPB a $35 million civil penalty. Further, the Bank was required to end alleged unfair billing practices and submit a compliance plan to the CFPB before continuing to market any add-on products by telephone or point of sale, or attempting to retain add-on product customers by telephone.

In the 57-page order the CFPB refers to an add-on product as “any consumer financial product or service…offered to Cardholders as an optional addition to credit card accounts issued by [Citibank].” The CFPB put several of Citibank’s add-ons at issue, which were for consumer services such as such as debt cancellation or deferral products, credit monitoring or credit report retrieval services, and services to notify credit and debit card issuers when a consumer reports cards lost or stolen.

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FTC Targets Banks under FDCPA

FTC Targets Banks under FDCPA

September 28, 2015

Authored by: Douglas Thompson

Who Is An FDCPA Excluded “Creditor”?

The FTC Seeks to Overturn An 11th Circuit Ruling That A Bank Is.

Banking lawyers whose institutions acquire loans or card accounts may want to watch how this 11th Circuit putative class action case issue plays out. The FTC’s brief supports the plaintiffs’ class action bar, and the outcome of the appeal if reversed could further spur both regulatory enforcement activity and consumer class actions.

The FTC recently filed an amicus brief in a consumer’s appeal pending in the US Court of Appeals for the 11th Circuit, Davidson v. Capital One Bank, NA, Case No 14-14200. In the appeal, the 11th Circuit affirmed the Northern District of Georgia’s dismissal of Davidson’s claims (and those of a putative class) under the Fair Debt Collection Practices Act, 15 USC § 1692.   The FTC now seeks en banc review to overturn the ruling. The FTC argues that the 11th Circuit misread the statute, decided contrary to several other circuits (the 3rd, 5th, 6th and 7th Circuits), and is placing consumers at risk. The FTC contends that the defendant bank clearly was a “debt collector” as defined by the statute.

The conundrum essentially turns on two issues: (a) the FDCPA’s exclusion of the “creditors” from the coverage of the statute and (b) whether the defendant bank was principally in the business of collecting debts owed to another. In the case, the defendant bank had acquired Davidson’s credit card account from another banking institution. The credit card debt was in default at the time of the acquisition. Some, including the FTC, would argue that this falls squarely within the definition of debt collector under the statute. However, the defendant Bank argued successfully that in the Davidson matter, the institution’s collection efforts only applied to debt it owned, not to another’s.

The statute uses the key phrase “to whom the debt is owed” in the exclusionary language regarding creditors. 15 USC § 1692a(6). Arguably in this case, once the bank acquired the credit card account, the debt is/was owed to that institution. This is precisely the basis on which both the Northern District of Georgia and 11th Circuit dismissed the claims. The rulings also note that the defendant bank is not principally in the business of collecting the debts of others.

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Oral Arguments on HWA Decision

On Monday, September 14, 2015, the Georgia Supreme Court heard oral arguments in the case of PNC Bank, National Assoc. vs. Kenneth D. Smith, et al., Case No. S15Q1445.

As noted in our prior blog post, this case is of great interest to banks operating in Georgia which are involved in real estate lending.  At issue is whether a lender may conduct a non-judicial foreclosure on real estate serving as collateral, and then pursue a guarantor without first pursuing a confirmation of the sale.  In addition, the Court is being asked to consider whether a guarantor may waive such a requirement.  In an earlier case, HWA Properties, Inc. v. Cmty. & S. Bank, 322 Ga. App. 877 (2013), the Court of Appeals held that a confirmation following a foreclosure sale is no longer a prerequisite to suing the guarantor for a deficiency when the guaranty waives such a confirmation.  Several other panels of the Court of Appeals have since reached a similar conclusion.

The arguments yesterday were dominated by questions from the bench, most of which came from Justice David Nahmias.  The questions asked by the Court revolved primarily around the following topics:

  • Whether the word “debtor” in the Confirmation Statute should be construed to include guarantors;
  • Whether the legislative history indicated that the General Assembly intended the Confirmation Statute to include protections for guarantors;
  • The exact scope of the holding in an earlier decision by the Court, First Nat. Bank & Trust Co. v. Kunes, 230 Ga. 888 (1973), and whether the Court had already held that the protections of the Confirmation Statute extended to guarantors;
  • The ramifications to lenders and borrowers from these holdings (as the Court put it, “the parade of horribles” alleged by each side); and
  • Whether the sanctity of the right to contract by guarantors and lenders should be recognized in such circumstances.

It was not at all clear from the proceedings which way the Court may rule.  Many of the justices did not ask any questions at all, and Justice Nahmias did not tip his hand during his usual intense questioning of both sides.  A decision is likely within the next few months.

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Georgia Garnishment Statute Held Unconstitutional

The recent opinion of Judge Marvin Shoob in the Strickland v. Alexander case has created a great deal of confusion among banks about their duties in responding to a summons of garnishment in Georgia.  In that opinion, Judge Shoob declared the Georgia garnishment statute to be unconstitutional on multiple grounds. Primary among the  grounds cited by Judge Shoob was the absence of any notice to the debtor of the existence of statutory exemptions which shield certain funds from garnishment or the procedures available to assert those exemptions.  It is unclear whether the decision will be appealed, modified, or cured by subsequent legislation.  Numerous esoteric questions have been raised by the legal community about the validity of the opinion, but those questions are beyond the scope of this post.

Whether Judge Shoob’s opinion is appealed, modified or cured by the Georgia General Assembly, banks currently face significant questions in its wake.  The most important of these questions is “should a bank continue to answer summons of garnishment or not.”  Many Georgia banks understandably have questions about their potential liability to both creditors and debtors by continuing to participate in the garnishment process.  While banks could choose to litigate the validity of every single summons that they have received or subsequently receive, that is hardly a practical or economical strategy for most of our banking clients.

An initial option available to any bank during this time is to contact the creditor which served the summons and ask that the summons be withdrawn. This may be effective since questions of liability are also being faced by the very creditors who are seeking to use the garnishment process.

If the creditor will not withdraw the summons, and pending a resolution of the constitutional issues by the courts or the General Assembly, the next best option is (1) to continue answering summons of garnishment after performing an appropriate review for the existence of funds covered by statutory exemptions and (2) to pay the non-exempt funds into the registry of the court.  Doing so will eliminate any risk the bank may run to the creditor which served the summons of garnishment through default or otherwise.  Moreover, since a summons is essentially a court order, the bank will have a strong argument that its actions are both justified and in good faith.  We note that even Judge Shoob found that the bank involved in the Strickland v. Alexander case could not be found liable for responding to the summons.  See Strickland Order at p. 9.

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Transfer of Servicing Letter under RESPA Triggers FDCPA Notice Requirements

The Fair Debt Collection Practices Act (“FDCPA”) provides that within five days of any initial communication with a consumer “in connection with the collection of any debt,” a debt collector shall send the consumer a written notice.  The notice must contain, among other things, the amount of the debt, the name of the creditor to whom the debt is owed, and a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed valid by the debt collector.

The Real Estate Settlement Procedures Act obligates a new servicer of certain types of mortgage loans timely to notify the borrower of the change in servicer and to provide certain other information regarding the transfer, including the effective date of the servicing transfer.

A recent case from the Second Circuit Court of Appeals (which covers New York and New England) holds that an attempt to comply with the Real Estate Settlement Procedures Act constitutes an “the initial communication with a consumer in connection with the collection of any debt” that requires the consumer be given the Fair Debt Collection Practices Act notice.

The debt collector mailed the consumer a letter entitled “Transfer of Servicing Letter.” An attachment stated it was “an attempt to collect upon a debt” and purported to explain some of the provisions of the Fair Debt Collection Practices Act.

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Bryan Cave Files Amicus Brief On Behalf Of Georgia Bankers Association Regarding Recent HWA Decision

Today, Bryan Cave filed an amicus curiae brief on behalf of the Georgia Bankers Association in a case currently pending before the Georgia Supreme Court styled PNC Bank, National Assoc. vs. Kenneth D. Smith, et al., Case No. S15Q1445.  The case is of great interest to banks operating in Georgia because the Supreme Court will be reviewing the reasoning of the HWA Properties, Inc. v. Cmty. & S. Bank, 322 Ga. App. 877 (2013) decision, in which the Georgia Court of Appeals held that a lender was entitled to pursue a guarantor for any deficiency remaining on a debt after a foreclosure, regardless of whether the lender had confirmed the foreclosure sale, if the guaranty included language waiving all defenses to collection of the debt.  As articulated in the amicus brief filed by Bryan Cave on behalf of the Georgia Bankers Association, a ruling by the Georgia Supreme Court upholding the HWA decision and its progeny will do much to correct the current abuse of Georgia’s foreclosure confirmation statute, O.C.G.A. § 44-14-16, which commercial borrowers and guarantors have long used to draw out foreclosure proceedings and prevent collection of any deficiency.  Oral argument in the case is scheduled for Monday, September 14, 2015.  A copy of the brief is available here.

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