Category Archives: Loan Servicing

CFPB Looks to Expand Its Oversight of Nonbanks through Two Controversial New Registries

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R. Andrew Arculin, R. Colgate Selden, Scott E. Wortman, Paula M. Vigo Marques, and Daniel V. Funaro

The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) released two new proposals that aim to expand the Bureau’s authority over nonbank financial institutions:

  1. A “repeat offender” registry of consent orders or settlements with an array of state and federal regulators relating to compliance with consumer protection laws (“Repeat Offender Proposal”); and
  2. A public registry of the terms and conditions nonbanks use in “form contracts” that consumers typically are not able to negotiate (“Terms and Conditions Proposal”).

Assuming these registries are created as proposed and survive any ensuing legal challenges, complying with the reporting obligations should be relatively easy. The larger challenge will be managing the increased regulatory and litigation risk imposed by the registries.

Repeat Offender Proposal

On December 12, 2022, the CFPB issued a proposal to establish a “repeat offender” registry requiring certain nonbank covered entities to report all final public written orders and judgments (including any settlements, consent decrees, or stipulated orders and judgments) obtained or issued by any federal, state, or local government agency for violation of a number of enumerated consumer protection laws, including those related to unfair, deceptive, or abusive acts or practices (“UDAAPs”).

After receiving these written orders and judgments, the CFPB intends to create a database of enforcement actions that would be available online for use by the public and other regulators. The database will be limited to final settlement or consent orders, so injunctions, preliminary orders, temporary cease-and-desist, and other tentative or temporary orders would not be reportable.

In addition, the proposal would require supervised nonbanks to submit annual written statements regarding compliance with an attestation for each underlying order by an executive with “knowledge of the entity’s relevant systems and procedures for achieving compliance and control over the entity’s compliance efforts.” These entities would also be required to identify a central point of contact related to an entity’s compliance with reportable enforcement actions.

The proposed rule would only apply to certain nonbank covered entities subject to CFPB’s authority. At present, insured depository institutions and credit unions, related persons, states, natural persons, and certain other entities are excluded from registry participation requirements. However, the CFPB stated in the press release for the proposal that it “might later consider collecting or publishing the information described in the proposal from insured banks and credit unions.”

Read the full client alert on our website.

CFPB Proposes COVID-19 Rule to Amend Its Mortgage Servicing Rule and Provide Additional Guidance Related to the Pandemic

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Jonathan K. Moore, Scott D. Samlin, Chenxi Jiao, and Louise Bowes Marencik

On April 5, 2021, the Consumer Financial Protection Bureau (“CFPB”) issued a notice of proposed rulemaking that proposes amendments to its Mortgage Servicing Rule (the “Proposed Rule”) to provide additional assistance for borrowers impacted by the COVID-19 emergency. The pandemic has resulted in nearly three million borrowers with delinquent mortgages, which is more homeowners in default than any time since the peak of the Great Recession in 2010. Nearly 1.7 million borrowers will exit forbearance programs in September and the following months upon expiration of the maximum term of 18 months in forbearance for federally backed mortgage loans. The Proposed Rule is intended to ensure that these homeowners have the opportunity to be evaluated for loss mitigation options prior to their loans being referred to foreclosure.

If finalized, the Proposed Rule would apply to all mortgages on a principal residence and amend Regulation X (12 CFR 1024).

To read the full client alert, please click here.

Florida Supreme Court Resolves Conflict on Business Records Exception to the Hearsay Rule and Clarifies Standard for Qualified Witness Testimony

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Wayne Streibich, Edward W. Chang, Nicole R. Topper, Anthony R. Yanez

On July 2, 2020, the Florida Supreme Court issued its written opinion[i] in Jackson v. Household Finance Corporation, III, 236 So. 3d 1170 (Fla. 2d DCA 2016) to resolve a conflict with a case decided by the Fourth District Court of Appeal (Maslak v. Wells Fargo Bank, N.A., 190 So. 3d 656 (Fla. 4th DCA 2016). Specifically, the issue concerned whether the predicates were met for admissions of records into evidence under the business records exception to the hearsay rule during the course of a bench trial in a residential foreclosure case. The Florida Supreme Court held that the proper predicate for admission can be laid by a qualified witness testifying to the foundation elements of the exception set forth in Section 90.803(6) of the Florida Evidence Code.

Background

On June 23, 2014, the originating lender, Household Finance Corporation III (“HFC”), filed a foreclosure complaint alleging a default under the note and mortgage. Before the loan was originated, HFC was purchased by HSBC Holdings (“HSBC”) and became a wholly-owned subsidiary of HSBC. The borrower did not challenge the default, but opted to challenge whether the lender could establish its case in chief at trial.

At trial, HFC called an assistant vice president at HSBC, with 25 years’ experience at the company, to establish the foundation for admission of records under the business records exception to the hearsay rule. The borrower objected to the witnesses’ testimony on hearsay grounds and the original note, mortgage, and payment history were received into evidence over the borrower’s objections. The borrower elected not to introduce any evidence of her own and the trial court entered final judgment of foreclosure. The borrower appealed to the Second District Court of Appeal, which affirmed the final judgment of foreclosure.

The Jackson case conflicted with the Maslak decision from the Fourth District Court of Appeal, which reached the opposite conclusion regarding the sufficiency of the bank witness’ testimony. In Maslak, despite the bank employee’s testimony describing her job duties and familiarity with the bank’s loan servicing practices, the court held that the witness was not qualified to lay a foundation for the admission of the loan servicing documents that were offered into evidence at that trial. As a direct conflict of two intermediate appellate court decisions on the same issue of law, the Florida Supreme Court had jurisdiction to resolve the issue.

Florida Supreme Court’s Decision

In examining the business records exception to the hearsay rule, the Florida Supreme Court noted that a party has three options to lay the foundation to meet that exception: (1) offering testimony of a records custodian, (2) presenting a certification that or declaration that the elements have been established, or (3) obtaining a stipulation of admissibility. If the party elects to present testimony, the applicable case law explains that it does not need to be the person who created the business records. The witness may be any qualified person with knowledge of each of the elements.

Patterned closely after the federal rule, Section 90.803 of the Florida Evidence Code[ii] lists the following foundational elements of the business records exception: (1) that the record was made at or near the time of the event, (2) that it was made by or from information transmitted by a person with knowledge, (3) that it was kept in the ordinary course of a regularly conducted business activity, and (4) that it was a regular practice of that business to make such a record.

Turning to the testimony of the HFC trial witness, the majority opinion determined that the foundational elements were met and that no additional foundation was required by the business records exception language of the Section 90.803(6). The majority rejected the notion that the witness was required to detail the basis for his or her familiarity with the relevant business practices of the company, or give additional details about those practices in order to lay the foundation for the admission of those records. Since no such requirements were in the statute, any requirement imposed by the trial court or the appellate court would be inconsistent with the plain language of the statute. The majority explained that once the proponent lays the predicate for admission, the burden shifts to the opposing party to prove that the records were untrustworthy or should not be admitted for some other reason. According to the majority, the Jackson borrower failed to do that in this case and only waited until after the documents were received into evidence to question the witness about the basis for his knowledge.

The dissenting opinion posited that the majority’s ruling “[took away] the proponent’s burden to lay a proper foundation for admission” and focused on whether the proper foundation was met in the Jackson case. The dissent argued that the testimony at the Jackson trial was merely “general statements” that recited the elements of the statute but did not explain how the business records at issue were generated, what they were used for, or how they were maintained. For that reason, the dissenting judges maintained that the burden never shifted to the borrower to prove the untrustworthiness of those records, and concluded that the majority’s treatment of the business records exception as a “magic words” test would only increase the likelihood of inadmissible documents being admitted into evidence.

Conclusion

Compliance with the business records exception to the hearsay rule will almost always be a hotly contested issue at a foreclosure non-jury trial in Florida. The Jackson opinion, and the arguments raised in the dissenting opinion, will remind the trial courts to pay careful attention to the foundational requirements of the business records exception to the hearsay rule when timely objections are made to the evidence on those grounds. Despite competing opinions on the issue, the Florida Supreme Court agrees that the proponent’s witness should demonstrate personal knowledge and establish that the offered exhibits are reliable business records. To remove all doubt, a witness’ testimony should demonstrate a working knowledge of the company’s business record practices and systems. As a result of the Jackson opinion, it is important to effectively prepare the business records custodian witness to withstand any increased scrutiny as to the foundation requirements of the business records exception to the hearsay rule.

[i] The Florida Supreme Court decided the case by a 4 to 2 margin. Newly appointed justice, Renatha Francis, did not participate in the opinion. This decision is not final until the disposition of a timely-filed rehearing motion.

[ii] This section was last revised in 2003, adding language that a certification or declaration is an acceptable means of authenticating a business record under the business records exception to the hearsay rule. See ch. 2003–259, § 2, at 1299, Laws of Fla.; see also Fla. Stat. § 90.803(6) (2003) (providing for admission of business records upon testimony of the custodian of the records, “or as shown by a certification or declaration that complies with paragraph (c) and s. 90.902(11)”).

New Jersey Supreme Court Confirms Assignee’s Right to Enforce Note Lost by Predecessor in Interest

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Wayne Streibich, Edward W. Chang, Jonathan F. Ball

On July 1, 2020, the Supreme Court of New Jersey issued its unanimous opinion in Investors Bank v. Torres confirming that an assignee of a note lost by a predecessor in interest can enforce the lost note.[1] The Supreme Court affirmed the Appellate Division, which had affirmed the trial court’s grant of summary judgment to the assignee.[2] The Supreme Court’s decision clarifies that an assignee seeking to enforce a note lost by its predecessor in interest must present: (1) an admissible and sufficient Lost Note Affidavit; and (2) competent proof of the terms of the lost note. The Supreme Court expressly declined to adopt the Appellate Division’s reasoning that the equitable principle of unjust enrichment required allowing the assignee to enforce the note lost by its predecessor in interest to prevent a borrower from keeping a home for which they are not paying the mortgage.

The borrower, Torres, executed a promissory note in favor of AMRO Mortgage Group, Inc. (“ABN”), which was secured by a residential mortgage in 2005. ABN subsequently merged into CitiMortgage, Inc. (“CitiMortgage”). Torres defaulted on the note in 2010. CitiMortgage instituted a foreclosure action, which it voluntarily dismissed without prejudice after discovering that it could not locate the original note.

In 2013, CitiMortgage executed a Lost Note Affidavit explaining that it was the “lawful owner of the note,” and had not “cancelled, altered, assigned, or hypothecated the note,” but was unable to locate the original note despite a “thorough and diligent search.” CitiMortgage attached a digital copy of the note to the Lost Note Affidavit. The digital copy was not endorsed, but CitiMortgage explained in the Lost Note Affidavit that the digital version was a true and correct copy of the original note that Torres had executed after the digital copy had been made.

CitiMortgage served a Notice of Default and Intention to Foreclose in 2014. After doing so, CitiMortgage assigned the mortgage to Investors Bank, thereby conveying to Investors Bank the right to enforce the note and mortgage executed by Torres. Investors Bank then brought the foreclosure action at issue in opposition to which Torres asserted that Investors Bank could not enforce the note due to the loss of the original.

The trial court granted summary judgment in favor of Investors Bank. The Appellate Division affirmed based upon its interpretation of N.J.S.A. 12A:3-309 (New Jersey’s version of Section 3-309 of the Uniform Commercial Code pertaining to enforcement of lost instruments) and based on the equitable doctrine of unjust enrichment. The Supreme Court granted Torres’ request for review on certification.

The Supreme Court concluded that N.J.S.A. 12A:3-309 does not limit the right to enforce a lost instrument exclusively to the possessor of the instrument at the time it is lost. Rather, Investors Bank’s right to enforce the assigned mortgage and the transferred lost note were supported by New Jersey’s statutes addressing assignments, N.J.S.A. 2A:25-1 and N.J.S.A. 46:9-9, as well as New Jersey’s common law principles regarding assignments. Because the Supreme Court concluded that New Jersey’s statutory and common law dictated the conclusion that Investors Bank could enforce the lost note, the Supreme Court expressly declined to rely on the equitable doctrine of unjust enrichment that the Appellate Division had invoked in support of its decision.

With this threshold legal issue having been resolved in Investors Bank’s favor, the Supreme Court turned to Torres’ challenges to the admissibility of the Lost Note Affidavit. The Supreme Court, like the Appellate Division, concluded that the trial court did not abuse its discretion in admitting and relying on the Lost Note Affidavit. The Supreme Court reasoned that: (1) the Lost Note Affidavit was properly authenticated under N.J.R.E. 901, and it qualified as a business record, an exception to the hearsay rule, under N.J.R.E. 803(c)(6); (2) a business record is admissible even if it was not created by the proponent of the report at trial (i.e., Investors Bank could introduce the Lost Note Affidavit as a business record even though it had been prepared by CitiMortgage); (3) the passage of unknown amount of time between the loss of the original note and execution of the Lost Note Affidavit did not render the Affidavit inadmissible; and (4) the Lost Note Affidavit was not inherently untrustworthy because: (a) it had been prepared more than a year before CitiMortgage assigned the mortgage to Investors Bank; (b) there was no incentive for CitiMortgage to fabricate a claim that it lost the original note and could not locate it despite diligent efforts; and (c) the digital copy of the note set forth the terms that Investors Bank was seeking to enforce.

In summary, an assignee has the same rights to enforce a lost promissory note that the possessor of the note at the time of its loss would have had. However, the assignee must present a sufficient Lost Note Affidavit and competent proof of the terms of the lost note.

Wayne Streibich would like to thank Edward W. Chang and Jonathan F. Ball for their assistance in developing this alert.

[1] Investors Bank v. Torres, ___ N.J. ___ (July 1, 2020). The slip opinion is available on the Court’s website here.

[2] Investors Bank v. Torres, 457 N.J. Super. 23 (App. Div. 2018), certif. granted, 236 N.J. 594 (2019).

New York’s Department of Financial Services Issues Regulation for Financial Institutions to Provide Relief to Consumers Suffering Financial Hardship Resulting from COVID-19 Pandemic

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Wayne Streibich, Diana M. Eng, Andrea M. Roberts, Scott D. Samlin

On March 21, 2020, in response to the COVID-19 pandemic, Governor Cuomo issued Executive Order 202.9, directing institutions regulated by New York’s Department of Financial Services (“NY DFS”) to provide financial relief to New York consumers experiencing financial hardship as a result of the pandemic. As a result, on March 24, 2020, NY DFS enacted Part 119 of Title 3 of the Official Compilation of Codes, Rules and Regulations of the State of New York (“NYCRR”) establishing standards and procedures that a “Regulated Institution” must follow in its review of requests for relief pursuant to Executive Order 202.9. Importantly, Section 119.2 defines a “Regulated Institution” as “any New York regulated banking organization as defined under New York Banking Law and any New York regulated mortgage servicer entity subject to the authority of the Department.” (Emphasis added).

Highlights of the NY DFS Regulation1

Section 119.3 directs the Regulated Institution to do the following for any individual who can demonstrate financial hardship as a result of the COVID-19 pandemic:

  • In connection with a residential mortgage of a property located in NY: (i) make applications for forbearance of any payment due widely available to any individual who resides in NY and (ii) grant such forbearance for a period of 90 days (subject to the safety and soundness requirements of the Regulated Institution). This provision does not apply to, and does not affect mortgage loans “made, insured, or securitized by any agency or instrumentality of the United States, any Government Sponsored Enterprise, or a Federal Home Loan Bank, or the rights and obligations of any lender, issuer, servicer or trustee of such obligations, including servicers for the Government National Mortgage Association.”
  • With respect to banking organizations: (1) eliminate fees charged for the use of ATMs that are owned or operated by the regulated banking organization; (2) eliminate any overdraft fees; and (3) eliminate any credit card late payment fees. (Regulated Institutions are not limited to these three requirements and may take additional actions if they so desire.)

Within ten (10) business days of the implementation of this regulation, i.e., by April 7, 2020, the Regulated Institution shall e-mail, publish on their website, mass mail, or otherwise broadly communicate to its customers how to apply for relief. The criteria, developed by the Regulated Institution, “shall be clear, easy to understand, and reasonably tailored to the requirements of the [R]egulated [I]nstitution to assess whether it will provide, consistent with the goals of Executive Order 202.9 and this regulation, applicable state and federal law, and the principles of safe and sound business practices, COVID-19 relief.” 3 NYCRR § 119.3(d)(1).

In addition, Section 119.3(e) outlines the requirements for processing applications for relief, as follows:

  • The Regulated Institution must process and respond to the request for relief no later than ten (10) business days after receiving all the information it needs to process the application;
  • The Regulated Institution must process the application for relief expeditiously; the Regulated Institution is responsible for developing and implementing the procedures to do so; and
  • Decisions on the application for relief shall be made in writing and provide the consumers the next steps if they are approved or denied the request.

Finally, Section 119.39(4) modifies Section 39 of the New York Banking Law concerning unsafe and unsound business practices. Under the modified section, it is an “unsafe and unsound business practice” if any Regulated Institution does not “grant a forbearance of any payment due on a residential mortgage for a period of ninety (90) days to any individual who has applied for such forbearance and demonstrated a financial hardship as a result of the COVID-19 pandemic as described herein.” NY DFS will consider, among other things, the adequacy of the process established by the Regulated Institution, the thoroughness of the review of the application, and the payment history, creditworthiness and financial resources of the borrower, in assessing whether a regulated institution has engaged in an unsafe or unsound practice. Regulated Institutions must also maintain copies of all files related to implementation of Part 119 for seven (7) years from March 24, 2020 (date of implementation of the regulation) and must make such files available for inspection at the NY DFS’ next examination of the Regulated Institution.

The standards and procedures set forth in Part 119 shall be in effect for ninety (90) days. After the expiration of the 90-day period, NY DFS will renew this emergency regulation, if necessary.

Conclusion

Regulated Institutions must implement processes and procedures to comply with Part 119 by April 7, 2020, including immediately setting up procedures to review applications for relief and taking the necessary steps to notify its customers of how to apply for such relief. Thus, Regulated Institutions should determine which of its loans, if any, are subject to this regulation and accept and review its customers for forbearance relief as described in the regulation.

Mr. Streibich would like to thank Diana M. Eng, Andrea M. Roberts, and Scott D. Samlin for their assistance in developing this alert.

1 This Alert provides the highlights of the regulation, which does not apply to any commercial mortgage or any other loans not described in the regulation. Please visit the NY DFS website for the complete regulation: dfs.ny.gov/system/files/documents/2020/03/re_new_pt119_nycrr3_text.pdf.

NY Appellate Court Holds Default Letter Stating Debt “Will Be Accelerated” Does Not Accelerate the Debt, De-Acceleration Must Be Clear and Unambiguous, and Standing, If Raised, Is an Element to De-Acceleration

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By: Wayne Streibich, Jonathan M. Robbin, Diana M. Eng, and Jacquelyn A. DiCicco

In Milone v. U.S. Bank National Association, New York’s Appellate Division, Second Department (“Second Department”), held that a notice of default sent to a borrower, stating that failure to cure the default within 30 days “will result in acceleration,” does not “clearly and unequivocally” accelerate the mortgage debt upon expiration of the cure period. 2018 WL 3863269, at *1, — N.Y.S.3d — (2d Dept. Aug. 15, 2018). In sum, the Second Department concluded that the word “will” indicates a future intention that “may always be changed in the interim” and, therefore, does not accelerate the debt for statute of limitations purposes. See id., at *3. In addition, the Second Department ruled that a de-acceleration notice must be clear and unambiguous, and, in a case of first impression, held that standing, when raised, is a necessary element to a valid de-acceleration. See id., at *5.

Please click here for the full client alert. 

Eastern District of New York Court Holds Debt Collection Letter Stating Settlement May Have Tax Consequences Does Not Violate the Fair Debt Collection Practices Act

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By: Jonathan M. Robbin, Diana M. Eng, and Andrea Roberts

In Ceban v. Capital Management Services, L.P., Case No. 17-cv-4554 (E.D.N.Y. Jan. 17, 2018), the District Court held that the statement “[t]his settlement may have tax consequences” in a debt collection letter does not violate the Fair Debt Collection Practices Act (“FDCPA”).

On or about August 6, 2016, Plaintiff, Julian Ceban (“Plaintiff”) received a collection letter from defendant Capital Management Services, L.P. (“Defendant”) concerning his outstanding debt (the “Letter”). The letter stated, in relevant part, that Defendant was “authorized to accept less than the full balance due as settlement” and that Plaintiff could “contact [Defendant] to discuss a potential settlement.” Further, the letter indicated: “This settlement may have tax consequences. If you are uncertain of the tax consequences, consult a tax advisor.” Continue reading →

Eleventh Circuit Rules that Consumers Have the Right to Partially Revoke Consent to Automated Calls under the TCPA

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By: Michael Esposito

The Eleventh Circuit Court of Appeals recently issued its opinion in Emily Schweitzer v. Comenity Bank, holding that the Telephone Consumer Protection Act, 47 U.S.C. sec. 227 et seq. (“TCPA”), allows consumers to partially revoke their consent to be called by an automated telephone dialing system. No. 16-10498 (Eleventh Cir. August 10, 2017).

In Schweitzer, Plaintiff was issued a credit card by Comenity Bank (“Comenity” or the “Bank”) in 2012 and, during the application process, provided a cellular phone number to the Bank. In 2013, Plaintiff failed to tender the required monthly credit card payments and, as a result, Comenity used an automated telephone dialing system to make hundreds of calls to Plaintiff on her cellular phone regarding the delinquency. During a call with a Comenity representative on October 13, 2014, Plaintiff informed the representative that Comenity could not call her in the morning and during the work day, because she was working and could not discuss the delinquency while at work. Subsequently, Plaintiff twice told a representative of Comenity to please stop calling her. Thereafter, Comenity did not call Plaintiff’s cellular phone using an automated telephone dialing system.

Ultimately, Plaintiff commenced a suit against Comenity for alleged violations of the TCPA. Specifically, Plaintiff claimed that during the October 13th conversation, she revoked her consent for Comenity to call her cellular phone using an automated telephone dialing system and asserted that Comenity violated the TCPA by placing over 200 calls using an automated system from October 2014 through March 2015. The district court granted summary judgment in favor of Comenity and reasoned that the bank “did not know and should not have had reason to know that [Plaintiff] wanted no further calls.” In addition, the district court stated that Plaintiff did not “define or specify the parameters of the times she did not want to be called” and, therefore, a reasonable jury could not find that Plaintiff revoked her consent to call her cellular phone. Plaintiff appealed.

On appeal, Comenity argued that the district court correctly granted summary judgment in its favor because the TCPA does not allow partial revocations of consent and, even if possible, a reasonable jury could not find that Plaintiff had expressly done so during the October 13th conversation. The Eleventh Circuit Court rejected Comenity’s arguments, finding that “[a]lthough the TCPA is silent on the issues of revocation, [its] decision in Osorio holds that a consumer may orally revoke her consent to receive automated phone calls.” See Osorio v. State Farm Bank, F.S.B., 746 F. 3d 1242, 1255 (11th Cir. 2014).

Further, the Eleventh Circuit explained that since the TCPA is silent as to partial revocations of consent, the analysis of the matter is governed by common law principles, which support its holding that the TCPA “allows a consumer to provide limited, i.e., restricted, consent for the receipt of automated calls.” Moreover, “[i]t follows that unlimited consent, once given, can also be partially revoked as to future automated calls under the TCPA.” In support of its conclusion, the Eleventh Circuit reasoned that it is “logical that a consumer’s power under the TCPA to completely withdraw consent and thereby stop all future automated calls . . . encompasses the power to partially withdraw consent and stop calls during certain times.” Although the Eleventh Circuit noted the district court’s concern that partial revocations may create challenges for both callers and parties attempting to present evidence in support of TCPA claims, it held that any such complications do not warrant limiting a consumer’s rights under the TCPA.

Second, with regard to Comenity’s argument that a reasonable jury could not find that Plaintiff’s statements made during the October 13th conversation constituted a partial revocation of consent under the TCPA, the Eleventh Circuit ruled that the “issue is close” and concluded that the matter of partial revocation was for the jury to evaluate. In reaching its conclusion, the Eleventh Circuit found that summary judgment was not warranted since reasonable minds might differ on the inferences arising from Plaintiff’s request not to be called “in the morning and during the work day.”

This decision is significant because the Eleventh Circuit has expanded the consumer’s right to revoke consent under the TCPA to include partial revocations. Based on this decision, debt collectors conducting business within the Eleventh Circuit will need to update their automated dialing systems to incorporate such partial revocations.

Second Circuit Holds That TCPA Does Not Permit Consumer to Unilaterally Revoke Consent for Telephone Contact Provided in Binding Contract

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By: Diana M. Eng and Andrea M. Roberts

In Reyes v. Lincoln Automotive Financial Services, the United States Court of Appeals for the Second Circuit recently held that the Telephone Consumer Protection Act (“TCPA”) does not permit a consumer to unilaterally revoke consent to be contacted by telephone when such consent is given as bargained-for consideration in a binding contract. Reyes v. Lincoln Automotive Fin. Servs., 2017 WL 3675363 (2d Cir. June 22, 2017).

Background

In 2012, Plaintiff-Appellant, Alberto Reyes, Jr. (“Plaintiff”), leased a car which was financed by Defendant-Appellee, Lincoln Automotive Financial Services (“Lincoln”). The lease contained a provision which expressly permitted Lincoln to contact Plaintiff. Plaintiff stopped making payments under the lease and, as a result, Lincoln called Plaintiff in an attempt to cure his default. Plaintiff disputed his balance on the lease and alleged that he requested that Lincoln cease contacting him. Despite Plaintiff’s alleged revocation of consent, Lincoln continued to call Plaintiff. As such, Plaintiff filed a complaint in the Eastern District of New York alleging violations of the TCPA.

The TCPA was enacted to protect consumers from “unrestricted telemarketing” which could be “an intrusive invasion of privacy.” See Mims v. Arrow Fin. Servs., LLC, 565 U.S. 368, 371 (2012) (internal citations omitted). Under the TCPA, any person within the United States is prohibited from “initiat[ing] any telephone call to any residential telephone line using an artificial or prerecorded voice to deliver a message without the prior express consent of the called party.” 47 U.S.C. 227(b)(1)(B).

Lincoln moved for summary judgment to dismiss the complaint, and the district court granted the motion, holding that (1) Plaintiff had failed to produce sufficient evidence to establish that he revoked his consent to be contacted and (2) the TCPA does not permit a party to a legally binding contract to unilaterally revoke bargained-for consent to be contacted by telephone. Plaintiff appealed both rulings.

The Second Circuit’s Decision

The Second Circuit affirmed the district court’s holding that under the TCPA, a consumer cannot unilaterally revoke its consent to be called when such consent was part of a bargained-for exchange.[1] In assessing whether a party can revoke prior consent under the TCPA, the Second Circuit agreed with the holdings of its sister courts that a party can revoke prior voluntary or free consent under the statute. See Gager v. Dell Financial Services, 727 F.3d 265 (3d Cir. 2013) (plaintiff permitted to revoke consent, where consent was provided in an application for a line of credit); Osorio v. State Farm Bank F.S.B., 746 F.3d 1242 (11th Cir. 2014) (plaintiff could revoke consent, where consent was provided in an application for auto insurance). The Second Court noted, however, that unlike in Gager and Osorio, Plaintiff’s consent was not provided gratuitously. Rather, Plaintiff’s consent was included as an express provision of a contract with Lincoln. Accordingly, the Second Circuit drew a distinction between the definition of consent under tort and contract law. Specifically, in tort law, the term “consent” is defined as a “voluntary yielding to what another purposes or desires.” Black’s Law Dictionary (10th ed. 2014). However, under contract law, “consent to another’s actions can ‘become irrevocable’ when it is provided in a legally binding agreement, in which case any ‘attempted termination is not effective.’” See Restatement (Second) of Torts 892A(5) (Am. Law Inst. 1979); see also 13-67 Corbin on Contracts 67.1 (2017).

The Second Circuit also determined that a contractual term need not be “essential” to be enforced as part of a binding agreement and that contracting parties are bound to perform on the agreed upon terms; a party who agreed to a valid term in a binding contract cannot later renege on that term or unilaterally declare that it no longer applies simply because the contract could have been performed without it. “[R]eading the TCPA’s definition of ‘consent’ to permit unilateral revocation at any time, as [Plaintiff] suggests, would permit him to do just that,” and the Second Circuit could not “conclude that Congress intended to alter the common law of contracts in this way.” (citation omitted).

Conclusion

This decision is significant, as it addressed the novel issue of whether consent that is given as part of a bilateral contract may be unilaterally revoked by a consumer under the TCPA. Based on Reyes, financial institutions that have consent provisions in binding contracts with consumers have a powerful defense against TCPA claims. In practice, if a contract with a consumer contains an express consent provision, the financial institution would need to agree to the consumer’s request to revoke. Financial institutions should also be cognizant that a consumer, who provides consent to be called in an application, may unilaterally revoke such consent.

[1] The Second Circuit also held that the district court erred in finding that no reasonable jury could find that Plaintiff revoked his consent, as Plaintiff had introduced sworn testimony of revocation. However, this error does not impact the ruling that Plaintiff nevertheless cannot unilaterally revoke his consent under the TCPA when such consent is part of a binding contract.

Florida Second District Court of Appeal Ruling Highlights the Possible Pitfalls of Relying on Prior Servicer Records

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By: Michael R. Esposito

Florida’s Second District Court of Appeal (“Second District Court”) recently held that a mortgagee failed to demonstrate it satisfied the condition precedent in a residential mortgage foreclosure. Allen v. Wilmington Trust, N.A., 2D15-2976, 2017 WL 1325896 (Fla. 2d DCA 2016). In Allen, the underlying mortgage contained the standard provision which requires a lender/servicer to notify the borrower of a default prior to the loan being accelerated and a foreclosure filed. In addition to the foregoing provision, the mortgage specified that any notice mailed in relation to the instrument “shall be deemed to have been given to [b]orrower when mailed by first class mail or when actually delivered to [b]orrower’s address if sent by other means.” Prior to the commencement of the action, a notice of default was mailed to the borrower by the prior loan servicer, EMC Mortgage Corporation (“EMC”), in accordance with the provision. Thereafter, Wilmington Trust, N.A. (“Wilmington”) filed a complaint on or about November 21, 2012, seeking foreclosure of the subject mortgage. In response to the lawsuit, the borrower denied Wilmington satisfied all conditions precedent to filing the lawsuit and raised an affirmative defense that asserted Wilmington failed to establish that a notice of default was provided as required by the mortgage.

During the bench trial, a corporate representative of the current servicer testified on behalf of Wilmington. The witness testified as to the boarding process used to verify the accuracy of the records of EMC and specified the related business records included a notice of default that was addressed to the borrower and dated March 12, 2010. Further, the witness testified that because the letter existed, it had been sent to the borrower and there were no records indicating the notice was returned as undeliverable. More importantly, the witness confirmed the business records associated with the loan did not specifically show the notice was actually mailed to the borrower and she was unable to testify as to EMC’s mailing procedures. In response, the borrower objected to the witness’ testimony that EMC mailed the notice and argued Wilmington failed to establish the appropriate foundation for the testimony since she was unfamiliar with the prior servicer’s procedures. Despite the trial court’s denial of the objection, the borrower argued at the close of the bench trial that Wilmington neglected to demonstrate it satisfied the condition precedent of mailing the notice of default. Ultimately, the trial court held the witness’ testimony as to the boarding process was sufficient to show Wilmington satisfied the condition precedent and entered a final judgment of foreclosure in favor thereof.

In reviewing the matter, the Second District Court held the trial court incorrectly relied on the boarding process to prove the notice of default was actually mailed. Although the witness’ testimony as to the boarding process was sufficient to support the admission of the notice of default, the Second District Court concluded that the testimony and evidence proffered failed to establish the notice of default was mailed to the borrower. In support of its conclusion, the Second District Court cited to Burt v. Hudson & Keyse, LLC, 138, So. 3d 1193 (Fla. 5th DCA 2014) and held that while the notice of default was dated, it did not contain any proof that the notice was mailed to the borrower. Without proffering further evidence of proof of regular business practice, an affidavit swearing that the notice of default was mailed, or a return receipt, Wilmington was only able to rely upon the testimony of its witness, who was unable to show personal knowledge of EMC’s general practice in mailing letters. As a result, the Second District Court reversed and remanded the action for dismissal since Wilmington was unable to demonstrate the notice of default was mailed pursuant to an established business procedure of EMC and, therefore, could not prove the required condition precedent was satisfied.

This case highlights the litigation risks associated with service transferred loans and the importance of current loan servicers obtaining all relevant business records and/or education on prior servicer policies and procedures.