Second Circuit Holds Payoff Letter Stating that “Total Amount Due” May Include Other Amounts that Are Not Yet Due Does Not Satisfy FDCPA Amount Due Requirement

By:      Jonathan Robbin and Thomas Brodowski

In Andrew Carlin, individually and on behalf of a class v. Davidson Fink LLP, Case No. 15-3105-cv (2d Cir. March 29, 2017),[1] the Second Circuit vacated an order and judgment of the District Court in favor of a debt collector, holding (1) that a mortgage foreclosure complaint is not an “initial communications” for purposes of § 1692g liability; and (2) that a Payoff Statement including the language “estimated fees, costs, additional payments, or escrow disbursements not yet due” does not state the “amount of the debt” as required by the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. (“FDCPA”).

In June 2013, Davidson Fink filed a foreclosure complaint (the “Complaint”) against Carlin, seeking to foreclose on a 2005 mortgage given by Carlin that was allegedly in default. The Complaint included a “Notice Required by the Fair Debt Collection Practices Act,” which referred Carlin to the Complaint for the “amount of the debt” and notified Carlin that he had thirty (30) days to dispute the validity of the debt. The Complaint, however, failed to state the amount of the debt.

Thereafter, Carlin sent Davidson Fink a letter on July 12, 2013 disputing the debt and requesting a verification of the exact amount purportedly owed. In response, Davidson Fink sent Carlin a letter dated August 9, 2013 which contained, among other things, a Payoff Statement. The Payoff Statement identified a “Total Amount Due” of $205,261.79. But, in small print below the amount due, the Payoff Statement included the following disclaimer:

“To provide you with the convenience of an extended “Statement Void After” date, the Total Amount Due may include estimated fees, costs, additional payments and/or escrow disbursements that will become due prior to the “Statement Void After” date, but which are not yet due as of the date this Payoff Statement is issued.”

Notably, the Payoff Statement did not include the amounts of the estimated fees, costs, or additional payments, nor did the Payoff Statement indicate how those amounts were calculated. Consequently, Carlin sued Davidson Fink for alleged violations of the FDCPA. Davidson Fink filed a motion to dismiss, which the District Court originally denied, but then reversed its ruling following Davidson Fink’s subsequent motion for reconsideration. Carlin appealed.

Under the FDCPA, a debt collector must, within five days after an initial communication with a consumer debtor in connection with the collection of any debt, send the consumer a written notice containing the amount of the debt. See 15 U.S.C. § 1692g(a). The FDCPA does not define an “initial communication,” but states that “[a] communication in the form of a formal pleading in a civil action shall not be treated as an initial communication for purposes of subsection (a) of this section.” 15 U.S.C. § 1692g(d) (added by the Financial Services Regulatory Relief Act of 2006, Pub. L. No. 109-351, § 802(a), Stat. 1966, 2006-07 (2006)). As such, the Second Circuit also held that mortgage foreclosure complaints are not “initial communications” for purposes of § 1692g liability.

Despite the Complaint not being the initial communication, the Second Circuit held that Davidson Fink’s follow-up August 9, 2013 letter (“August Letter”) constituted the “initial communication” and was sent in connection with the collection of the debt.[2] Having determined that the August Letter was an initial communication sent to collect a debt, the Second Circuit also held that the amount of the debt stated in the August Letter was insufficient under § 1692g. Using the least sophisticated consumer standard, the Second Circuit held that because the Payoff Statement did not identify the “estimated fees, costs, [and] additional payments,” nor did it explain how those amounts are calculated, the Court was unable to determine if those amounts were properly part of the debt owed.[3] Thus, absent fuller disclosure, an unsophisticated consumer would not be able to do so either.

The Second Circuit emphasized that debt collectors like Davidson Fink can take added measures to shield themselves from FDCPA liability by revising their standard payoff statements or by including the safe harbor language formulated in the Avila v. Riexinger & Assocs., LLC[4] case.

Thus, debt collectors should ensure that Payoff Statements are clear and ambiguous as to the date in which the amount stated in the payoff will be good through and that if the funds are not received by that date, payment will increase over time.

[1] Carlin v. Davidson Fink LLP, 2017 U.S. App. Lexis 5438 (2d Cir. March 29, 2017)

[2] Plaintiff Carlin argued his July 12, 2013 letter to Davidson Fink constituted the “initial communication” but, it is well-settled that communications initiated by debtors to debt collectors are not “initial communications” under the FDCPA. See, e.g. Derisme v. Hunt Leibert Jacobson P.C., 880 F. Supp. 2d 339, 367-68 (D. Conn. 2012); Lane v. Fein, Such & Crane, LLP, 767 F. Supp. 2d 382, 387 (E.D.N.Y. 2011); Gorham-Dimaggio v. Countrywide Home Loans, Inc., No. 1:05-cv-0583, 2005 WL 2098068, at *2 (N.D.N.Y. Aug. 30, 2005).

[3] The FDCPA defines “debt” as “any obligation or alleged obligation of a consumer to pay money arising out of a transaction…, whether or not such obligation has been reduced to judgment.” 15 U.S.C. § 1692a(5).

[4] 817 F.3d 72 (2d Cir. 2016) (holding though not required by the text of the statute, a notice would also satisfy § 1692g if it used language such as: “As of today, [date], you owe $  . This amount consists of a principal of $   , accrued interest of $   , and fees of $   . This balance will continue to accrue interest after [date] at a rate of $   per [date/week/month/year].”).

Second Circuit Upholds Bankruptcy Court Order Denying Borrowers’ RESPA Claim on the Grounds the QWR Was Mailed to the Incorrect Address

By: Andrea M. Roberts

In Barry F. Mack v. ResCap Borrower Claims Trust, Case Number 16-304 (2d Cir. Jan. 31, 2017) the Second Circuit recently affirmed the Bankruptcy Court’s order sustaining Residential Capital, LLC’s (“ResCap”) objection to the borrowers, Barry and Cheryl Mack’s (“Borrowers”) Proof of Claim for damages based on, among other things, failure to respond to a Qualified Written Request (“QWR”) in violation of the Real Estate Settlement Procedures Act (“RESPA”). The Second Circuit held that Borrowers’ Proof of Claim was properly denied, because Borrowers did not mail the QWR to the designated address and therefore, ResCap’s lack of response did not violate RESPA.

In 2009 Borrowers sent a QWR to GMAC Mortgage LLC (“GMAC”) querying why an erroneous foreclosure action against them remained pending even though GMAC had notified them that they were not in default. Notably, Borrowers did not send the QWR to the address designated by GMAC for receipt of QWRs. Instead, Borrowers sent the QWR to the address designated for “General Inquiries.” GMAC never responded to Borrower’s QWR.

In May 2012, ResCap and 51 of its subsidiaries, including GMAC, filed for bankruptcy.[1] Borrowers timely filed a Proof of Claim for money damages premised upon, among other things, a violation of RESPA for GMAC’s failure to respond to the QWR. After a trial, the Bankruptcy Court sustained ResCap’s objection to the Borrower’s RESPA claim on the grounds that the Borrowers failed to mail the QWR to the correct address. Borrowers appealed.

Under RESPA, a mortgage servicer can “establish a designated address for QWRs.” See Roth v. CitiMortgage Inc., 756 F.3d 178, 181 (2d Cir. 2014). If a servicer designates a specific address for receipt of QWRs, “then the borrower must deliver its request to that office in order for the inquiry to be a ‘qualified written request.’” Id. (quoting RESPA, § 6, Transfer of Servicing of Mortgage Loans (Regulation X), 59 Fed. Reg. 65,442, 65,446 (Dec. 19, 1994)). The failure to send the QWR to a servicer’s designated address “does not trigger the servicer’s duties under RESPA.” Id. (quoting Berneike v. CitiMortgage, Inc., 708 F.3d 1141, 1148-49 (10th Cir. 2013).

The Second Circuit found that although there is no dispute that the Borrowers sent a QWR to GMAC, and GMAC failed to respond to the QWR, because Borrowers did not send the QWR to GMAC’s designated address for receipt of QWRs, the duty to respond to the Borrower’s letter under RESPA was never triggered. Therefore, GMAC did not violate RESPA. Accordingly, the Second Circuit held that the Bankruptcy Court properly sustained ResCap’s objection to the Borrowers’ RESPA claim.

In practice, borrowers or their counsel have attempted to attach purported QWRs to pleadings and then allege RESPA violations for failure to respond. This decision confirms that financial institutions cannot be liable under RESPA if the QWR is not directed to the designated address.

[1] GMAC is a named debtor under the Borrower Claims Trust Agreement dated December 17, 2013 (the “Agreement”). Under the Agreement, in pursuing any borrower-related causes of action, such matters and/or execution of any documents relating thereto, are to be in the name of “ResCap Borrower Claims Trust.”

NY Appellate Court Holds CPLR 205(a) Applies to Note Owner’s Successor in Interest If Prior Action Not Dismissed for Failure to Prosecute

By: Andrea M. Roberts and Diana M. Eng

In Wells Fargo Bank, N.A., as Trustee, in Trust for the Registered Holders of Park Place Securities, Inc., Asset-Backed Pass-Through Certificates, Series 2005-WCW1 v. Doron Eitani, Index No. 2014-9426 (2d Dept. Feb. 8, 2017), the New York Appellate Division, Second Department, determined the novel issue of whether a plaintiff, such as the Trust, who is a successor in interest as the holder and owner of the note and mortgage, is entitled to take advantage of the savings provision of CPLR 205(a). The Second Department decided in the affirmative by affirming the denial of defendant David Cohan’s motion pursuant to CPLR 3211(a)(5) to dismiss the foreclosure action on the grounds that it was time-barred.

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Magistrate Judge Declines to Apply Spokeo to FCRA Case Against TransUnion

By: Louise Bowes Marencik

On January 18, 2017, a federal magistrate judge concluded that the ruling in Spokeo does not apply to a putative class action brought against TransUnion.

In Miller v. TransUnion, LLC, the plaintiff alleged that TransUnion violated Section 1681g(a) of the Fair Credit Reporting Act by providing misleading and confusing information to consumers which suggested that their names appear on the Office of Foreign Assets Control’s (OFAC) list of terrorists, money launderers, drug traffickers, and other enemies of the United States.  No. 3:12-CV-1715, 2017 U.S. Dist. LEXIS 7622 (M.D. Pa. Jan. 18, 2017).  On August 3, 2015, the United States District Court for the Middle District of Pennsylvania stayed the proceedings because the United States Supreme Court had granted certiorari in Spokeo Inc. v. Robins. On May 16, 2016, the Spokeo Court opined on the standard for the injury-in-fact requirement to establish standing under Article III of the United States Constitution, which requires that plaintiffs must show “concrete” and “particularized” injuries, as it relates to claims under the Fair Credit Reporting Act (FCRA). 136 S. Ct. 1540 (2016). The Court held that the appellate court’s standing analysis was incomplete because it failed to consider the distinction between concreteness and particularization, and it did not address whether the particular procedural violations alleged in the case caused sufficient risk to meet the concreteness requirement.

In the instant case, the Court lifted the stay on May 31, 2016, and allowed for briefing on the issue of whether the Spokeo decision had any impact on the plaintiff’s motion for class certification. TransUnion argued that Miller failed to argue a sufficiently “concrete” injury to support standing under Article III.  In his January 18, 2017 Report and Recommendation, Magistrate Judge Martin C. Carlson noted that, in Spokeo, the Court explained that a bare procedural violation does not satisfy this requirement, using the example of a credit report containing an incorrect zip code as a FCRA violation that would not constitute a concrete harm. However, the Spokeo Court clarified that an intangible harm may be sufficiently concrete to allow standing under Article III. The Judge chose to follow the United States District Court for the Northern District of California’s decision in a similar case involving OFAC disclosures, where the Court found that the confusing disclosure could cause concrete harm in the form of emotional distress about whether the recipient is listed in the OFAC database. Larson v. TransUnion, LLC, 2016 WL 4367253, *2 (N.D. Cal. Aug. 11, 2016).   Accordingly, the Judge recommended that the United States District Court for the Middle District of Pennsylvania decline to accept TransUnion’s interpretation of Spokeo, and find that Miller’s alleged injuries were sufficiently particularized and concrete to establish standing under Article III.  Assuming the Court follows this recommendation, the decision could suggest that Spokeo’s impact on a plaintiffs’ ability to show injuries caused by FCRA violations will be less substantial than originally thought.

 

 

 

Beyond the Constitutionality of the CFPB: D.C. Circuit Decision Limits Scope of Fines and Enforcement Actions

By Joe Patry

Most media reports and commentary discussing the recent D.C. Circuit opinion on the CFPB focused on the Constitutional issues involving how the Director of the CFPB is appointed and may be removed, but overlooked the decision’s potentially significant benefit to the financial services industry. The key impact on the financial services industry is the D.C. Circuit’s restriction on the extent of the CFPB’s ability to levy penalties and bring enforcement actions.

D.C. Circuit Decision

On October 11, 2016, a three-judge panel of the United States Court of Appeals for the District of Columbia Circuit overturned an administrative decision by the CFPB, which previously imposed a $109 million fine against PHH Mortgage Corporation (“PHH”). The D.C. Circuit rejected the CFPB’s attempt to apply its changed interpretation of the Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. § 2601(b)(2), retroactively, and ruled that the CFPB erroneously ignored the expiration of the applicable statute of limitations to inappropriately inflate the amount of the imposed fine.

HUD’s Prior Interpretation of RESPA

Before the CFPB was created, the Department of Housing and Urban Development (“HUD”) was responsible for regulations interpreting Section 8(a) of RESPA. See PHH v. CFPB et al., No. 15-1177 at 14.[1] This section of RESPA prohibits mortgage companies from giving kickbacks or other incentives to vendors. Id.

HUD issued guidance regarding mortgage reinsurance, which is used by mortgage insurance companies to reduce risk. Id. at 83. Under certain circumstances, mortgage companies were allowed to refer consumers to mortgage reinsurance companies that the mortgage lenders themselves owned. Id.

CFPB Switches Course

Contrary to HUD’s long-standing interpretation, the CFPB decided that RESPA prohibits these reinsurance practices. Id. Based on this changed interpretation of RESPA, the CFPB brought an administrative enforcement proceeding against PHH. Id. During the proceeding, the CFPB imposed a $109 million fine on PHH for reinsurance charges that were eventually passed on to borrowers. Id. PHH challenged the CFPB’s authority to enforce the fine in the court system. Id.

CFPB’s Arguments before the D.C. Circuit

Before the D.C. Circuit, the CFPB argued that the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) authorizes the CFPB to bring enforcement actions but that Dodd-Frank contains no explicit statute of limitations to govern actions brought under this power. Id. As a result, the CFPB asserted that it is not bound by RESPA’s three-year statute of limitations. Id. at 12. This is significant because PHH argued that the vast majority of the allegedly prohibited charges were barred by the expiration of the statute of limitations. Id. Additionally, the CFPB argued that it was authorized to apply its changed interpretation of RESPA retroactively. Id. at 83.

D.C. Circuit Rejects the CFPB’s Position

The D.C. Circuit soundly rejected both of the CFPB’s arguments. First, the D.C. Circuit found that Dodd-Frank and RESPA together restricted the CFPB to bring cases only within the statute of limitations. Id. at 93. Nothing in Dodd-Frank explicitly states that the CFPB is not bound by any applicable statutes of limitation; if Congress had intended this to be the law, it would have said so. Id. at 98 (stating that Congress does not “hide elephants in mouseholes”) (internal citations omitted). The D.C. Circuit further noted that the CFPB’s limitless interpretation of its authority was “absurd.” Id. at 99.

Second, the D.C. Circuit found that the CFPB’s attempt to retroactively apply its changed interpretation of RESPA is unconstitutional. The D.C. Circuit ruled: “When a government agency officially and expressly tells you that you are legally allowed to do something, but later tells you ‘just kidding’ and enforces the law retroactively against you and sanctions you for actions you took in reliance on the government’s assurances, that amounts to a serious due process violation. The rule of law constrains the governors as well as the governed.” Id. at 87. (emphasis in original).

The D.C. Circuit remanded the administrative enforcement proceeding back to the CFPB. Id. at 100. Because of this decision, the agency will not be able to rely on its retroactive interpretation of RESPA and must consider the applicable statute of limitations when assessing potential fines. Id.

Although this decision from a three-judge panel of the D.C. Circuit could be reversed by the entire D.C. Circuit or the United States Supreme Court, this decision is potentially a significant win for financial institutions. First, mortgage companies that referred consumers to mortgage reinsurance companies that the mortgage lenders themselves owned, or relied on other HUD interpretations of RESPA, can take comfort in knowing that the CFPB cannot retroactively apply its changed interpretation of RESPA. Second, the CFPB’s ability to bring enforcement actions is governed by the applicable statutes of limitation, so the ability to enforce is not timeless or limitless.

[1] All references to pagination is to how the pages are numbered in the opinion released on the United States Court of Appeals for the District of Columbia’s website on October 11, 2016.

New York Appellate Court Holds That RPAPL 1304(4) Does Not Bar Actions Commenced More Than One Year After Mailing 90-Day Notice

By: Alexander J. Franchilli

On August 24, 2016, the New York Supreme Court, Appellate Division, Second Department, held that the 90-day notice required under Real Property Actions and Proceedings Law (“RPAPL”) § 1304(1) does not expire one year after its initial mailing. See Deutsche Bank Nat. Trust Co. v. Webster, 2016 N.Y. Slip Op 05846 (2d Dep’t 2016).  Under RPAPL § 1304(1), “a lender, an assignee or a mortgage loan servicer” must mail a notice containing statutorily prescribed language at least 90 days before commencing an action against the borrower of a home loan.

In Webster, the plaintiff commenced an action to recover a money judgment on a promissory note pursuant to RPAPL § 1301 on January 24, 2014. The plaintiff moved for summary judgment, and submitted a copy of a letter, dated April 15, 2011, to demonstrate compliance with the 90-day notice requirements of RPAPL § 1304.

The defendant cross-moved to dismiss the complaint, arguing, among other things, that the 90-day notice expired before the action was commenced.  In opposition, the plaintiff contended that the requirements of RPAPL § 1304 were not applicable because the plaintiff was not seeking to foreclose a mortgage.

Although the court determined that RPAPL § 1304 “is applicable to all legal actions involving home loans commenced against the borrower,” the court rejected the defendant’s argument that the 90-day notice had expired.

The court examined the language of RPAPL § 1304(4), which states: “[t]he notice and the ninety day period required by subdivision one of this section need only be provided once in a twelve month period to the same borrower in connection with the same loan.” Id.  The Court found that “the language does not state that the action must be commenced within 12 months of the RPAPL 1304 notice.”  Instead, the Court interpreted the language of RPAPL § 1304(4) as standing for the proposition that “if there are multiple defaults in the 12-month period, only one RPAPL 1304 notice is required.” Id.

This decision is significant for creditors because the Second Department has clarified that RPAPL 1304 does not require more than one 90-day notice and that such notice does not expire one year after it is mailed to the borrower.

Fifth Circuit Holds that a Request for Proof of Authority to Collect Does Not Constitute a “Qualified Written Request” Under RESPA

By:      Joshua A. Huber

On July 14, 2016, the Fifth Circuit Court of Appeals issued its opinion in In re Parker, holding that a qualified written request (“QWR”) pursuant to the Real Estate Settlement Procedures Act, 12 U.S.C. § 2605 (“RESPA”), does not encompass a borrower’s written request for proof of a lender’s status as the noteholder, or its authority to collect payments under a promissory note and deed of trust.[1]

The borrowers in In re Parker served their lender with correspondence titled “RESPA Qualified Written Request, Complaint, Dispute of Debt & Validation of Debt Letter,” which primarily questioned whether the lender was the owner of their promissory note with authority to collect payments.[2] The borrowers alleged in their subsequent lawsuit against the lender that this letter constituted a valid QWR and that the lender was liable under RESPA for its failure to respond and provide evidence of its authority.[3]

In rejecting the borrowers’ claim, the Fifth Circuit first noted that the borrowers were required to demonstrate, as a threshold matter, that the correspondence they sent to the lender was in fact a QWR within the meaning of RESPA.[4] The court observed that a valid QWR “must be related to the servicing of the loan,” which RESPA defines as “receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan . . . and making the payments of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan.”[5] Because the borrowers’ purported “QWR” requested only proof of the lender’s authority to collect payments under the promissory note and deed of trust, which does not relate to “servicing of the loan” under RESPA, the Fifth Circuit affirmed the dismissal of the borrowers’ claim.[6]

This is a significant development in RESPA jurisprudence, as it clarifies the limited scope and purpose of a QWR. The decision also provides lenders in the Fifth Circuit with a strong defense to RESPA violation claims premised on failure to respond to “show-me-the-note” correspondence from borrowers, as opposed to legitimate servicing-related inquiries.

[1] In re Parker, No. 15-41477, 2016 WL 3771837, at *4 & n.26 (5th Cir. Jul. 14, 2016).

[2] Id. at *1.

[3] Id. at *1 & n.4.

[4] Id. at *4.

[5] Id. (quoting 12 U.S.C. §§ 2605(e)(1)(A) & (i)(3))(emphasis added).

[6] Id. at *4 & n.6 (emphasis added).