Pre-assignment foreclosure filing may violate the Fair Debt Collection Practices Act

The Sixth Circuit Court of Appeals, in Wallace v. Washington Mutual, recently announced that filing a foreclosure complaint, before the note and mortgage have been transferred and assigned to the Plaintiff, may violate the Fair Debt Collection Practices Act. (the “FDCPA”). More importantly, the court noted that the FDCPA may be violated even if state law permits the Plaintiff to cure a real-party in interest defect after the complaint is filed. Finally, although the defendant in this case was the law firm that represented the foreclosure plaintiff, depending on the circumstances, a servicer may be liable under the same theory that was announced by this court.Sometime in 1999, Betty Wallace purchased a home that she financed with a mortgage loan from Norwest Mortgage. Norwest later merged with Wells Fargo who, in March or April of 2008, sent Ms. Wallace notice of default.On July 22, 2008, Washington Mutual (“WAMU”) filed a complaint against Ms. Wallace. The complaint claimed that she was in default under the Norwest Note and Mortgage and that WAMU was the “holder of the note and the mortgage.” However, for the purposes of Ms. Wallace’s appeal, at the time the complaint was filed, WAMU was not the holder of the note or the mortgage. Ultimately, Ms. Wallaces home was foreclosed.

In July 2009, Ms. Wallace sued WAMU, Wells Fargo, and the foreclosure firm, for violations of the FDCPA. Specifically, Ms. Wallace alleged that the foreclosure firm made false and deceptive representations in connection with the collection of a debt because at the time the foreclosure complaint was filed WAMU was not the holder of the note or the mortgage. The district court dismissed Ms. Wallace’s complaint because it concluded that “failure to record an assignment of mortgage before filing a foreclosure action is not a deceptive practice under the [FDCPA]. Ms. Wallace appealed.

The Sixth Circuit Court of Appeals reversed the judgment of the district court. The Sixth Circuit found that a law firm makes a “false, deceptive and misleading representation” when it files a complaint that falsely alleges that the plaintiff is the owner and holder of the note and mortgage. The court, however, did not stop there.

The court determined that a violation can occur even if, as a matter of state procedural law, a lender can cure a real-party in interest defect by making the necessary transfers and assignments at any time before judgment. Stated another way, if the complaint contains factually inaccurate statements that tend to “mislead or confuse,” for the purposes of the FDCPA the lender’s ability to fix the problem after the fact is immaterial. In essence, this decision has the potential to render the “can I file before the paperwork is in order” debate that is raging before the Ohio Supreme Court moot and irrelevant.

Finally, it is noteworthy to point out that while this case involved a suit brought against the law firm, the prohibition against false and misleading representations applies to anyone that is considered to be a “debt collector” under the FDCPA. In turn, the definition of a “debt collector” includes a servicer or assignee if the loan was in default at the time of the transfer. Accordingly if the plaintiff, or the servicer, are considered to be “debt collectors” they may be vicariously liable for any false or misleading statements in the complaint.

Geauga County, Ohio sues MERS over recording fees

Following on the heels of a similar lawsuit by Dallas County Texas, late last week, Geauga County Ohio filed a class action lawsuit against MERSCORP and a number of financial institutions. The suit suggests that MERS and its members wrongfully avoided recording mortgage assignments and as a consequence, they have adversely affected the accuracy of Ohio’s land records and deprived Ohio counties of recording fees. Among other remedies, the suit seeks declaratory relief that would effectively end the practice of using MERS to freeze mortgages.

The action was filed by the Geauga County Prosecuting Attorney on behalf of all eighty-eight Ohio counties.

The lawsuit claims that Ohio’s recording statutes require mortgage assignments to be “recorded in proper county recording offices” and “County recorders are required to collect nominal fees” for the service. The County further contends that, by failing to record intervening assignments, MERS and its members have “violated … Ohio’s statutory recording requirements,” they have “systematically broke[n] chains of land title throughout Ohio,” and as a consequence, they have “eviscerated the accuracy of Ohio counties’ public land records.”

In the suit, the County has requested a number of remedies, including a declaration that MERS’ business model and practices violate Ohio law. Additionally, the County has asked the trial court to order MERS and its members “to correct their failure to record each and every prior and future … mortgage assignment” and have them “pay attendant recording fees.”

As with any lawsuit of this nature and magnitude, we can expect that any examination of the merits will be preceded by lengthy and robust litigation of a number of procedural and jurisdictional issues. During this phase, we should learn more about the factual and legal basis of the County’s case. Be that as it may, at this point, there is little doubt that this lawsuit amounts to a direct challenge of the MERS model.