Mortgage foreclosure is debt collection under the FDCPA

Last June, the Sixth Circuit decided that a law firm could be liable, under the Fair Debt Collection Practices Act (“FDCPA”), for stating the wrong identity of the mortgage owner, in a foreclosure complaint. In effect, the Sixth Circuit held that a pre-assignment foreclosure filing could violate the FDCPA. Earlier this month, the same court decided another case involving the application of the FDCPA to judicial foreclosure proceedings. This latest case strongly suggests that misstatements in a foreclosure complaint, and presumably other court filings, subject not only the plaintiff’s attorney to to FDCPA, but the loan servicer client as well.

In Glazer v. Chase Home Fin., the U.S. Sixth Circuit Court of Appeals elected not to follow the view adopted by the majority of district courts, and decided instead that “mortgage foreclosure is debt collection under the [FDCPA].” As a consequence, law firms, and in some instances loan servicers, that foreclose in Ohio, Michigan, Kentucky, and Tennessee, may be held liable for FDCPA violations that occur during judicial foreclosure proceedings. A full appreciation of the potential impact of this decision, however, requires an understanding of the conduct, as alleged by the plaintiff, that served as the basis of the FDCPA claims.

Sometime in 2003, Charles Klie took out a loan with Coldwell Banker Mortgage Corporation (“Coldwell”), and gave Coldwell a note and mortgage. Shortly after the loan closed, Coldwell transferred the note and assigned the mortgage to Fannie Mae. Coldwell continued to service Klie’s loan, but for reasons not stated in the opinion, the assignment to Fannie Mae was not recorded.

Four years later, in 2007, JP Morgan Chase Bank (“JP Morgan”) assumed servicing of Klie’s loan. As part of the servicing transfer, Coldwell purported to assign the note and mortgage to JP Morgan. But, as alleged by Glazer, Coldwell no longer had any rights to assign. In turn, JP Morgan purported to assign the note and mortgage to Fannie Mae. As in the case of the second Coldwell assignment, JP Morgan had no interest to assign since Fannie Mae already held all rights to the note and mortgage.

A month or so later, Chase Home Finance LLC (“Chase”) began servicing Klie’s loan. Chase accepted three payments, the last of which was for January 2008. Regrettably, Klie passed away on January 31, 2008, and the loan soon went into default.

In June of that year, Chase hired counsel to initiate foreclosure proceedings. As part of the the referral, the law firm prepared an assignment that purported to transfer and assign the note and mortgage from JP Morgan to Chase. This assignment, however, “transferred absolutely no rights because Fannie Mae still owned the note and mortgage by virtue of Coldwell[‘s] assignment….”

In June 2008, Chase’s attorneys filed a foreclosure complaint in state court and alleged that Chase held and owned the Klie note. The Complaint further stated that the “original note had been lost or destroyed.” According to Glazer, however, Chase was not the owner and holder of the note, and the original note had not been lost or destroyed. Rather, Fannie Mae owned the note, and the original was in the possession of a third-party that was acting as the custodian.

In July 2008, Klie’s estate transferred the mortgaged property to Lawrence Glazer, who was a beneficiary under Klie’s will. As a consequence, Chase’s attorneys amended the foreclosure complaint and again asserted that Chase owned the note. What followed were fifteen months of discovery and pre-trial litigation the highlights of which included: Chase’s attorneys moving for and being granted summary judgment; summary judgment being vacated and Chase’s attorneys being ordered to produce the original note; Chase’s attorneys scheduling a Sheriff’s sale after the foreclosure judgment had been vacated; and ultimately, Chase’s dismissal of its claims, without prejudice.

Not surprisingly, in the midst of the foreclosure proceedings, Glazer sued Chase and its attorneys for violations of the FDCPA. In particular, Glazer asserted that, among other things, Chase and its attorneys falsely stated that Chase owned the note and mortgage, they improperly scheduled a foreclosure sale, and they refused to provide verification of debt.

After Glazer filed his lawsuit, Chase and the attorneys separately moved to dismiss the FDCPA claims. Each of them, however, did so on different grounds. The magistrate hearing the case agreed with the defendants, and recommended dismissal. Glazer then moved to amend the claims asserted against Chase, but the District Court denied his motion for leave to do so, it adopted the magistrate’s recommendation, and dismissed Glazer’s suit. Glazer then appealed to the Sixth Circuit.

In reaching its decision, the Sixth Circuit separately analyzed the District Court’s dismissal of the claims against Chase from those asserted against the law firm. Ultimately, the Sixth Circuit affirmed the dismissal of the claims against Chase, but this outcome is by no means representative of the bigger picture.

The Servicer’s Dismissal

The FDCPA only applies to “debt collectors.” In turn, the term “debt collector” consists of a general definition followed by a number of exceptions. One such exception provides that the term “debt collector” does not include a person collecting a debt that was not in default at the time it was acquired. Stated another way, a loan servicer is not considered a “debt collector” if it began servicing the loan when it was current. In Glazer, “[a]ccording to Glazer’s own allegations, Chase obtained the Klie loan for servicing before default. Therefore, Chase [was] not a debt collector.” Moreover, even though Glazer had uncovered a “reciprocal collection agreement” that suggested Chase had agreed to service the Klie loan only after it fell into default, he waited too long to seek leave to amend his complaint.

Chase’s dismissal, therefore, was the product of Glazer’s procedural mistake, not the result of a substantive defense. Moreover, in view of the court’s analysis, it looks like Chase won the battle, but loan serivcers generally may have lost the war. If Glazer’s complaint had alleged that Chase began servicing Klie’s loan after it went into default, Chase may not have been able to remove itself from the lawsuit.

The Attorneys’ Dismissal

The claims against Chase’s attorneys were dismissed because the District Court followed the view that foreclosure is not debt collection. The Sixth Circuit declined to follow this view, even though it represents that of the majority of the district courts. Instead, the Sixth Circuit noted that “whether an obligation is a ‘debt’ depends not on whether the obligation is secured, but rather upon the purpose for which it was incurred….Thus, if a purpose of an activity taken in relation to a debt is to “obtain payment” of the debt, the activity is properly considered debt collection.” Relying on this reasoning, the Sixth Circuit concluded that regardless of whether a money judgment is sought, mortgage foreclosure is debt collection under the FDCPA.

Looking Forward

In Wallace v. Washington Mut. Bank, the Sixth Circuit held that a law firm could be subject to FDCPA liability for stating the wrong identity of the mortgage’s owner in a foreclosure complaint. Glazer now affirms this principle and further suggests that other misstatements contained in a pleading, and presumably any other court filing, may give rise to violations of the FDCPA. More importantly, taken together, Wallace and Glazer support the proposition that a servicer who began servicing a loan after it was in default may also be held liable, together with its attorneys, for and such misstatements. Certainly, there are other defenses a servicer could raise against the applicability of the FDCPA. In practice, however, because of the nature of these cases and the risks involved, not being joined in the first place is preferable to prevailing a year or two after a Fair Debt case is filed against you.

Wallace and Glazer illustrate how important it is to recognize and appreciate the distinction between servicing a loan and being a party to a lawsuit. This distinction becomes even more important when the subject matter of a lawsuit is a consumer transaction that is covered by the FDCPA.

Wallace and Glazer also illustrate that a pre-filing due diligence analysis, of the claims a servicer will assert in a lawsuit, is a necessary component of any sound default servicing strategy. Stated another way, it is not enough for a servicer to conclude that its internal records support the filing of a lawsuit. Rather, the servicer, together with its attorneys, must review, verify, and document, before the suit is filed, that the plaintiff can prove each and every element of the claims that will be asserted.

To do this effectively, it is essential that the servicer and its attorneys establish effective two-way communication, which is the hallmark of a functional attorney-client relationship. So the next time you evaluate your default servicing process, ask yourself this: If you refer a matter to your attorney, and he has questions or concerns about your case, will the person that takes his call be able to help?

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