Borrowers Sue Lender Over Alleged Wrongs From Loan Modification Agreement
Borrower’s Federal Court Claims, Following State Court Foreclosure, Dismissed

Fair Debt Collection Practices Act Claim Survives Motion To Dismiss

The Stender case discussed in my post last week also dealt with the defendant’s motion for judgment on the pleadings as to the borrowers’ Fair Debt Collection Practices Act (“FDCPA”) claim.  Please review last week’s post for the Stender context. 

Borrower’s theory.  Borrowers alleged that defendant refused to honor a loan modification contract and, as a result, attempted collection in violation of the FDCPA.  Importantly, at issue was a consumer debt, not a commercial one, meaning that the FDCPA potentially applied.  For more on the scope of the FDCPA, please review my posts dated 11/16/06 and 12/18/09.  The FDCPA generally does not apply to commercial foreclosures. 

Creditor/debt collector.  The defendant first argued its mortgage servicer was a “creditor” not a “debt collector” under the FDCPA and thus was exempt from the statute’s provisions.  The Stender opinion explains in detail the distinction between debt collectors and creditors.  Creditors generally are not covered by the FDCPA, while debt collectors are.  The plaintiffs’ response was that the current servicer did not originate the loan and thus as an assignee was not a “creditor” under the FDCPA. 

Timing of loan assignment.  The legal significance of the loan assignment was in the spotlight.  The important facts, according to the Court, were when the plaintiff’s mortgages went into default and when the assignments of the mortgages to the defendants occurred.  See, 15 U.S.C. § 1692a

(6)  The term “debt collector” means any person who . . . regularly collects or attempts to collect, directly or indirectly, debt owed or due or asserted to be owed or due another . . ..  The term does not include-  

    (F)  any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity . . . (iii) concerns a debt which was not in default at the time it was obtained by such person.

In other words, if borrowers were in default at the time defendant was assigned the loan, then defendant would be considered a “debt collector” subject to the FDCPA.  If, on the other hand, borrowers were not in default at the time of the assignment, defendant would be a “creditor” exempt from the FDCPA. 

Can kicked.  Given the procedural context of the case (a motion for judgment on the pleadings), the Court deferred that factual determination for summary judgment or trial holding:

[P]laintiffs allege in their complaint that they sought loan modifications in 2009 and 2010.  It is entirely consistent with these allegations for plaintiffs to suggest that they had done so because by that point they had defaulted on their mortgages.  This would have occurred before 2011, when [defendant suggests] the Lowell property was assigned to them.  If plaintiffs’ hypothesis proves correct, and they were in default before the mortgages were assigned to [defendant], then [defendant] would qualify as a “debt collector.”  Put simply, at this time, a set of facts consistent with the plausible allegations of the complaint could establish that [defendant was a] “debt collector” under the FDCPA, so the court cannot dismiss plaintiffs’ FDCPA claim based on [defendant’s] argument. 

Items subject to collection.  The borrowers’ also alleged in Stender that defendant attempted to collect late fees and interest above and beyond what was allowed under the alleged loan modification agreement.  The Court found that the allegations were “sufficient to put defendants on notice of a plausible claim.”  15 U.S.C. § 1692f prohibits “the collection of any amount (including interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”

In Stender, which dealt with residential mortgages, the borrowers’ FDCPA claims survived the defendant’s motion for judgment on the pleadings, a relatively easy burden to overcome.  Whether the claims would survive summary judgment was not addressed.