Category Archives: Loan Servicing

Mortgage Servicer Held to Be in Violation of Servicemembers Civil Relief Act for Attempted Collection of Foreclosure-Related Fees from Servicemember on Active Duty

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By: Sridavi Ganesan
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In Brewster v. Sun Trust Mortgage, Inc., 742 F.3d 876 (9th Cir. 2014), decided on February 7, 2014, the Ninth Circuit ruled that a mortgage servicer violated the Servicemembers Civil Relief Act (“SCRA”) (50 U.S.C. app. § 501 et seq.), due to its efforts to collect fees related to a rescinded Notice of Default while the servicemember borrower was on active duty.  The SCRA is intended to postpone or suspend certain civil obligations to enable service members to devote full attention to duty and relieve stress on the family members of those deployed servicemembers.

In Brewster, the plaintiff was a Lieutenant Colonel in the United States Marine Corps reserves, who was called for active duty during three separate periods between 2008 and 2011.  While he was on active duty, the plaintiff failed to make payments on his home mortgage.  This original mortgage servicer, Sun Trust Mortgage, Inc. (“SunTrust”), therefore initiated the foreclosure process and recorded a Notice of Default.  The amount of the default included fees associated with initiating foreclosure.  The Notice of Default was eventually rescinded, but Sun Trust failed to remove the foreclosure fees from the plaintiff’s account.  Nationstar Mortgage LLC (“Nationstar”) subsequently became the new servicer of the loan and attempted to recover the fees from the plaintiff while the plaintiff was away on active duty.  Id. at 877-878.

After the plaintiff filed his action, Nationstar removed the fees from the account.  Id. at 878, fn 2.  Still, the Court found that Nationstar’s attempt to collect on the fees while the plaintiff was on active duty, regardless of whether any fees were even collected, was itself a violation of the SCRA.  The Court’s ruling hinged on its liberal construction of the term “foreclosure,” as found in section 533(c) of the SCRA.  Section 533(c) of the SCRA states in part that: “[a] sale, foreclosure, or seizure of property for a breach of an obligation described in subsection (a) [a mortgage that originated before the servicemember’s military service] shall not be valid if made during, or within one year after, the period of the servicemember’s military service….”  50 U.S.C. app. §533(c).  The court found that, per the language found elsewhere in the statute, the term “foreclosure” included foreclosure proceedings, so that it applied not just to a single act but a process.  Id. at 879.  Further, the Court analyzed section 2924 of the California Civil Code governing California non-judicial foreclosure and found imposition of fees to be integral to the foreclosure process. Id.  Based on these findings, and taking into account the legislative purpose of the SCRA to allow servicemembers to have peace of mind as to affairs at home while on active duty, the court defined “foreclosure” to include fees related foreclosure proceedings.  Id.

Seventh Circuit FDCPA Ruling May Foreshadow CFPB Rule on Time-Barred Debts

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By Michael Meehan

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.

Will Florida Courts Enforce Mortgage Statute of Limitations Waivers?

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By: Manuel S. Hiraldo

In 2006, nationwide foreclosure filings began a significant upward trend that peaked in 2010 with approximately 2.9 million filings that year. [i] For various reasons, some actions filed since 2006 have been dismissed by courts. The re-filing of these dismissed lawsuits may result in the raising of statute of limitations defenses by debtors.  In Florida, the five (5) year statute of limitations for foreclosure actions begins to run when the mortgage loan is accelerated.[ii]. The filing of a foreclosure lawsuit constitutes acceleration of the loan.[iii] Typically, therefore, it is the filing of a foreclosure proceeding that will trigger the five (5) year statute of limitations.

Whether a subsequent foreclosure action filed more than five (5) years after the first proceeding is barred by the statute of limitations is an issue that has not yet been decided by courts in Florida. At least one Florida federal court has found that the voluntary dismissal of an earlier foreclosure action did not bar a subsequent foreclosure action based on defaults on subsequent payments that were less than five years old.[iv] Under this holding, a plaintiff would be able to file suit more than five years after the first action, but would only be entitled to make a claim for payments owed by the debtor that were less than five years old from the date of filing.[v]

The Fourth District Court of Appeal in Florida has held that the dismissal of the first foreclosure lawsuit results in de-acceleration of the loan.[vi] Arguably, under this line of reasoning, de-acceleration of the loan would result in tolling the running of the statute of limitations, since the plaintiff would no longer be demanding payment owed under the loan. This would permit the plaintiff to re-file suit as long as dismissal of the first action did not occur more than five years after the initial filing.

One lesser-known approach for addressing a statute of limitations defense asserted in response to a re-filed foreclosure action is the statute of limitations waiver found in some mortgages. An example of such a waiver is as follows:

26. Waiver of Statute of Limitations. The pleading of the statute of limitations as a defense to enforcement of this Security Instrument, or any and all obligations referred to herein or secured hereby, is hereby waived to the fullest extent permitted by applicable law.

States that have upheld similar statute of limitations waivers, including California[vii], New Jersey[viii], Vermont[ix], and Montana[x] have reasoned that the statute of limitations confers a personal right which is not protected by public policy and which may be waived.[xi] States that have found statute of limitations waivers unenforceable include New York[xii], Texas[xiii], Ohio[xiv], and Arkansas[xv]. In these states, statute of limitations waivers are seen as contrary to public policy.[xvi] Florida courts have not yet addressed statute of limitations waivers found in mortgages. Further, case law regarding the enforceability of statute of limitations waivers in general is limited.

At least one Florida appellate court has upheld a written statute of limitations agreement.[xvii] This was done by the First District Court of Appeal in the case of Pritchett v. Kerr, 354 So. 2d 972 (Fla. 1st 1978). In Pritchett, the plaintiff brought a medical malpractice claim in federal court.[xviii] The defendant failed to timely answer the complaint.[xix] Subsequently, the plaintiff and defendant entered into a stipulation pursuant to which the plaintiff agreed to waive the right to seek a default.[xx] In return, the defendant agreed waived his right to assert a statute of limitations defense in the event of dismissal of the case by the federal court.[xxi]

The federal court dismissed the suit and the plaintiff re-filed the case in state court.[xxii]In response to the state court action, the defendant moved to dismiss on the basis of the running of the statute of limitations, which the trial court granted.[xxiii] On appeal, the First DCA reversed the trial court’s ruling, holding that the lower court erred in failing to give effect to the agreement and stipulation of the parties, because “[t]he statute of limitations is an affirmative defense which can be waived.”[xxiv] The Pritchett court did not raise any public policy concerns in its analysis.[xxv] Rather, the court noted that the defendant had obtained the benefit of the plaintiff’s performance and was therefore clearly bound by the terms of their agreement.[xxvi]

While authority on whether statute of limitations waivers are enforceable is lacking in Florida, cases analyzing the enforceability of mortgage jury trial waivers are instructive, particularly where the right to a jury trial is constitutionally protected, unlike the right to assert the statute of limitations as a defense. Florida courts that have analyzed jury trial waivers have unanimously approved and enforced such waivers.[xxvii]

In all, while limited, case law in Florida supports the enforceability of statute of limitations waivers contained in mortgages, and suggests that Florida will ultimately join other jurisdictions in enforcement of such waivers.  The approval of Florida courts with respect to mortgage jury trial waivers further lends support to this position.  As previously noted, foreclosure filings peaked in 2010.  This would make 2015 the peak year for statute of limitations issues as a result of the five-year limitations period.  As these issues make their way to the appellate courts, we should see opinions enforcing limitations waivers, or at least delineating their applicability in the foreclosure context.

[i] RealtyTrac Staff, 1.4 Million U.S. Properties with Foreclosure Filings in 2013 Down 26 Percent to Lowest Annual Total Since 2007, (January 12, 2014).

[ii] Pursuant to Florida Statute section 95.11(2)(c), the five-year statute of limitations begins to run when the loan is accelerated. See Monte v. Tipton, 612 So. 2d 714, 716 (Fla. 2d DCA 1993)(Section 95.11(2)(c) accrues when optional acceleration clause is invoked).

[iii] Delandro v. America’s Mortg. Servicing, 674 So. 2d 184, 186 (Fla. 3d DCA 1996)(“The complaint in this case indicates that the acceleration took place on February 9, 1994, when the lender filed the mortgage foreclosure complaint and stated, in paragraph 11, that ‘Plaintiff declares the full amount payable under the note and mortgage to be due.’”); Parise v. Citizens Nat’l Bank, 438 So. 2d 1020, 1022 (Fla. 5th DCA 1983)(“Acceleration may be set in motion by filing a pleading in a suit on the full indebtedness.”). “Default by the makers alone [does] not accelerate the indebtedness.” Cent. Home Trust Co. v. Lippincott, 392 So. 2d 931, 933 (Fla. 5th DCA 1980).

[iv] Kaan v. Wells Fargo Bank, N.A., 2013 WL 5944074, at *3 (S.D. Fla. 2013) (“[w]hile any claims relating to individual payment defaults that are now more than five years old may be subject to the statute of limitations, each payment default that is less than five years old…created a basis for a subsequent foreclosure and/or acceleration action.”)(citing Singleton v. Greymar Assocs., 882 So. 2d 1004, 1008 (Fla. 2004) and Fla. Stat. § 95.11(2)(c)).

[v] See id.

[vi] See Olympia Mortgage Corp. v. Pugh, 774 So. 2d 863, 866 (Fla. 4th DCA 2000)(dismissal of lawsuit resulted in mortgagee not accelerating payment on the note and mortgage).

[vii] Prior to the enactment of California Code of Civil Procedure section 360.5, unlimited statute of limitations waivers were upheld as valid by California courts, including the Supreme Court of California. See Dexter v. Pierson, 1 P. 2d 435, 436 (1931); Brownrigg v. deFrees, 238 P. 714, 716 (1925); State Loan etc. Co. v. Cochran, 130 Cal. 245, 248 (1900); Wells, Fargo & Co. v. Enright, 127 Cal. 669, 673-74 (1900); McGee v. Jones, 79 Cal.App. 403, 404 (2d Cal. 1926). However, after the enactment of section 360.5, unlimited waivers were abolished for all practical purposes. Carlton Browne & Co. v. Superior Court, 210 Cal. App. 3d 35, 41 (2d Cal. 1989).

[viii] Hudson County Nat. Bank v. Simpson, 5 N.J. Super. 135, 139 (App. Div. 1950); Quick v. Corlies, 39 N.J.L. 11 (Sup. Ct. 1876).

[ix] State Trust Co. v. Sheldon, 35 A. 177 (1896).

[x] Parchen v. Chessman, 49 Mont. 326 (1914).

[xi] Brownrigg, 238 P. at 716; Sheldon, 35 A. at 177.

[xii] John J. Kassner & Co. v. New York, 415 N.Y.S.2d 785, 789 (1979).

[xiii] Squyres v. Christian, 253 S.W.2d 470, 472 (Tex. Civ. App. 1952).

[xiv] Alliance First National Bank v. Spies, 158 Ohio St. 499, 501 (1953).

[xv] First National Bank of Eastern Arkansas v. Arkansas Development Finance Authority, 44 Ark.App. 143, 146 (1994).

[xvi] See id.

[xvii] See Pritchett v. Kerr, 354 So. 2d 972 (Fla. 1st DCA 1978).

[xviii] Id. at 973.

[xix] Id.

[xx] Id.

[xxi] Id.

[xxii] Id.

[xxiii] Id.

[xxiv] Id.

[xxv] Id.

[xxvi] Id. at 974.

[xxvii] See e.g. Ladner v. AmSouth Bank, 32 So. 3d 99 (Fla. 2d DCA 2009)(affirming trial court’s enforcement of jury trial waiver contained in mortgage); C & C Wholesale, Inc. v. Fusco Management Corp. 564 So. 2d 1259 (Fla. 2d DCA 1990) (waiver of jury trial in lease enforceable); Palomares v. Ocean Bank of Miami 574 So. 2d 1159, 1160 (Fla. 3d DCA 1991)(citing Poller v. First Virginia Mortgage and Real Estate Inv. Trust, 471 So. 2d 104, 106 (Fla. 3d DCA); Credit Alliance Corp. v. Westland Mach. Co., Inc., 439 So. 2d 332 (Fla. 3d DCA 1983); Central Inv. Assoc., Inc. v. Leasing Serv. Corp., 362 So.2d 702 (Fla. 3d DCA 1978)) (rejecting argument that a contractual waiver of jury trial is “constitutionally impermissible”)).