The Seventh Circuit Court of Appeals recently issued a consolidated opinion, McMahon v. LVNV, 744 F.3d 1010 (7th Cir. 2014), involving time-barred debts under the Fair Debt Collection Practices Act (FDCPA). The opinion addressed two cases on appeal, McMahon v. LVNV, 2012 U.S. Dist. LEXIS 92655 (N.D. Ill., July 5, 2012), and Delgado v. Capital Management Services, 2013 U.S. Dist. LEXIS 40796 (C.D. Ill. March 22, 2013). Each case involved a communication from a debt collector that contained a limited-time offer to settle a time-barred debt. In each case, the plaintiff contended that the letter constituted a “false, deceptive or misleading representation” by the debt collector because an unsophisticated consumer could be led to believe the time-barred debt was enforceable in court.
Although an issue of first impression in the Seventh Circuit, this issue had been heard previously by the Third and Eighth Circuits, with each court holding that, absent litigation or a threat of litigation, such a dunning letter would not violate the FDCPA. See Huertas v. Galaxy Asset Mgmt., 641 F.3d 28, 33 (3d. Cir. 2011); Freyermuth v. Credit Bureau Servs., Inc., 248 F.3d 767, 771 (8th Cir. 2001). However, the Seventh Circuit expressly disagreed with the Third and Eighth Circuits, holding that actual or threatened litigation is not necessary to state a valid claim on this fact pattern. The court reasoned that the FDCPA prohibits false representation of the “character, amount or legal status” of the debt (§ 1692e(2)A)) and prohibits a debt collector from threatening to take any action that cannot legally be taken (§ 1692e(5)). Under this standard, an unsophisticated consumer could believe that a letter offering to settle a debt implies that the debt is legally enforceable. Thus, such a communication from a debt collector could mislead an unsophisticated consumer into believing that the debt is legally enforceable and could therefore constitute a violation of the FDCPA, regardless of whether the letter actually threatens litigation. Notably, however, the court did not hold that it is automatically improper to seek re-payment of time-barred debts and further hinted that a general disclaimer within the dunning letter could have resolved any issue.
The McMahon decision creates a circuit split that may eventually warrant U.S. Supreme Court review. But equally important to the holding in McMahon was the position taken by the Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) in an amicus brief filed with the Seventh Circuit. See Brief of Amici Curiae Federal Trade Commission and Consumer Financial Protection Bureau Supporting Affirmance, No 13-2030, Seventh Circuit. In the brief, the CFPB takes the position that actual or threatened litigation is not necessary to demonstrate a potential FDCPA violation, and asserts that, while attempting to collect a time-barred debt does not, per se, violate the FDCPA, in many circumstances a debt collector must disclose that the collector cannot sue to collect the debt and must inform a consumer that providing a partial payment would revive the collector’s ability to sue to collect the balance. The Seventh Circuit gave considerable weight to the amicus brief, calling it a “well-reasoned position” and stating that it was inclined to rely upon the agencies’ “empirical research and expertise.”
Foreshadowing of New FDCPA Rule?
The CFPB has taken an unwavering position on the time-barred debts issue, and in March 2014, it filed an additional amicus brief on this same issue in a Sixth Circuit case, Buchanon v. Northland Group, Inc. See Brief of Amici Curiae Federal Trade Commission and Consumer Financial Protection Bureau Supporting Reversal, No 13-2523, Sixth Circuit. The Bureau is currently reviewing the federal rules and regulations governing debt collection, consistent with its authority under Dodd-Frank, and comments to its November 2013 advanced notice of proposed rulemaking (ANPR) closed in February 2014. The ANPR strongly hints that the CFPB is considering some form of required disclosure from a debt collector to a consumer when collecting on a debt that is time-barred, although the nature and scope of such disclosure is unclear. The CFPB’s position in the amicus briefs could foreshadow a future standard regarding time-barred debts under the FDCPA, and it is likely the CFPB’s position will find its way into an NPR expected to be issued in the coming months.
Impact on Loan Servicers
It is well-established that mortgage servicers are not considered debt collectors under the FDCPA, unless the loan being serviced was in default at the time the mortgage servicer acquired servicing rights. See 15 U.S.C. § 1692a(6)(f)(ii)-(iii). However, in the aftermath of the credit crisis, and in a climate where the servicing rights of delinquent loans are regularly transferred, FDCPA compliance is an increasingly important issue for mortgage servicers. When a servicer acquires servicing rights of a delinquent loan, its communications with a consumer relating to that loan are governed by the FDCPA and its promulgating regulations. Servicers acquiring a new portfolio of loans often need to contend with statute of limitations issues relating to delinquent loans, particularly as we move further from the heart of the credit crisis.
While mortgage servicers await the NPR, they should take note of the CFPB’s position in McMahon and Buchanan and the potential direction of FDCPA regulation in this area. Mortgage servicers should examine their FDCPA protocols and methods of communication with consumers to ensure compliance with this new interpretation and the potential new standard under the FDCPA.