Tuesday, January 22, 2019

Kraninger seeks clear authority to enforce the Military Lending Act

Consumer Financial Protection Bureau Director Kathleen L. Kraninger has asked Congress to grant the CFPB clear authority to supervise for compliance with the Military Lending Act (MLA). Kraninger delivered a proposal to the House of Representatives that would amend the Consumer Financial Protection Act to explicitly state that the CFPB has nonexclusive authority to require reports and conduct examinations to assess compliance with the MLA.

Since Kraninger's confirmation as Bureau Director in December 2018, the Democratic members of the House Committee on Financial Services have urged her to commit, in writing, to resuming a consistent supervisory role over consumer protection laws, including the MLA. In their letter, the lawmakers charged that during former director Mick Mulvaney’s tenure, the CFPB discontinued enforcement, "neglecting its responsibility under the law to protect servicemembers and their families."

Senate Banking Committee Ranking Member Sherrod Brown (D-Ohio) has also criticized the CFPB for failing to monitor financial services institutions for violations of the MLA, stating, "The CFPB is neglecting its duty to protect the women and men who serve and protect our country. The CFPB has broad authorities--Congress does not need to take action, the CFPB Director does."

According to a Banking Committee minority press release, under former director Richard Cordray, the CFPB used its supervisory authority to proactively examine banks and nonbank lenders for violations of protections under the MLA, but under Mick Mulvaney the CFPB ended those examinations and said it would reconsider whether the Bureau has the authority to examine lenders for compliance with the MLA.


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Tuesday, January 8, 2019

Is nonjudicial mortgage foreclosure debt collection? Supreme Court hears arguments

 
Is a law firm carrying out a nonjudicial foreclosure on behalf of a client engaging in debt collection that is subject to the Fair Debt Collection Practices Act? Questions posed by the Supreme Court justices during oral arguments in Obduskey v. McCarthy & Holthus, LLC, implied sympathy for the homeowner’s position that he was protected by the FDCPA, offset by skepticism that the language of the Act actually provided that protection.
The arguments raised by the petition for certiorari focused on the interplay between two parts of the FDCPA:
  1. the definition of "debt collector" in 15 U.S.C. §1692a(6) (the "general purpose" definition"); and
  2. the special provisions included in 15 U.S.C. §1692f(6) that ban unfair practices by persons who are attempting "to effect disposition or disablement of property" (the "limited purpose definition").
The first sentence of the general purpose definition says that a person is a debt collector if he uses interstate commerce or the mail in any business that has debt collection as its principal purpose, or he "regularly collects or attempts to collect, directly or indirectly, debts owed" to someone else. However, the third sentence adds that, for the purposes of 15 U.S.C. §1692f(6), "debt collector" includes someone who uses interstate commerce or the mail in a business that has the enforcement of security interests as its principal purpose.
 
The issue presented was whether a law firm that was engaged in a nonjudicial foreclosure, but that never demanded any payment from the homeowner, was collecting a debt.
 
Effect of no payment demand. According to the Tenth Circuit opinion in Obduskey v. Wells Fargo, the bank began servicing the homeowner’s mortgage while it was still current. After the mortgage fell into default, the bank started, but halted, foreclosures several times over a six-year span. In 2014, the company hired McCarthy & Holthus to initiate a nonjudicial foreclosure. That process was started by a letter to the homeowner in which the firm said that it had been instructed to begin foreclosure and that it "may be considered to be a debt collector attempting to collect a debt." The homeowner responded with a suit claiming FDCPA violations.
 
Three U.S. appellate courts and the Colorado Supreme Court have decided that nonjudicial foreclosures constitute debt collection, the Tenth Circuit said in its opinion. However, one appellate court—the U.S. Court of Appeals for the Ninth Circuit—and a number of U.S. district courts have determined that the FDCPA is not implicated. The Tenth Circuit concluded that the nonjudicial foreclosure was not debt collection under the FDCPA because the law firm had not demanded any payment from the homeowner.
 
"[E]nforcing a security interest is not an attempt to collect money from the debtor," the appellate court said. In the process of reaching that conclusion, the court disregarded the homeowner’s argument that the end goal of any foreclosure is obtaining payment on the mortgage loan debt.
 
Homeowner’s arguments. Attacking the Tenth Circuit’s decision, Daniel L. Geyser, the homeowner’s attorney, described a statutory organization in which the FDCPA first defined who was a debt collector and then added to that group, for purposes of 15 U.S.C. §1692f(6), those persons who were not covered by the general purpose definition but were covered by the limited purpose definition because they were enforcing a security interest.
 
When challenged by Justice Alito to explain who might be covered by the limited purpose definition of 15 U.S.C. §1692f(6) but not the general purpose definition of 15 U.S.C. §1692a(6), Geyser described a traditional repossession agent who would repossess a car, deliver the car to the creditor, be paid for his services, and not care whether the creditor sold the car or not. Such a person would not be collecting any payment, but he still would be a debt collector under the limited purpose definition.
 
Justice Gorsuch, however, noted that 15 U.S.C. §1692f(6) not only bans unfair practices, it also bans threats to take banned actions. In other words, it bans talking to the affected consumer. Why was talking to the consumer not covered by the general purpose definition, making the limited purpose definition superfluous, he asked? Geyser argued that the threat might not be an effort to collect payment.
 
In essence, the justices appeared to view the two "debt collector" definitions as separate, with the limited purpose definition adding a group of persons who were not covered by the general purpose definition. On the other hand, Geyser attempted to convince them that a person could be covered by one or both definitions. Justice Sotomayor alone expressed agreement with that proposition.
 
Geyser also attempted to minimize the law firm’s claims that the homeowner’s position would set up conflicts with requirements of state law.
 
In his main argument and his rebuttal, Geyser also cited a different FDCPA section, 15 U.S.C. §1692i, which sets venue rules for collection suits. Under that section, a debt collector who is suing to enforce a security interest must sue in the judicial district where the property is located. That section says nothing about seeking a deficiency judgment, so it must mean that foreclosure constitutes debt collection, he argued.
 
Law firm’s arguments. Kannon K. Shanmugam, the law firm’s attorney, conceded in response to a question by Chief Justice Roberts that creditors don’t want to own houses, they want to be paid, and that foreclosing a mortgage is a way to be paid. However, he also said that foreclosing a mortgage is a way to be paid that is distinct from being paid by the homeowner. The foreclosure does not demand payment by the homeowner. "[N]ot everything that could lead to the elimination of a debt constitutes debt collection," he said.
 
Justice Kagan did not accept that argument, asserting instead that a foreclosure was merely an alternative method of securing payment. Justice Kavanaugh seconded that belief, noting that a foreclosure inherently communicated a "pay up or lose your home" message. "[C]ommon sense tells you this is an effort to have you repay the debt," he said.
 
Shanmugam replied that the purpose of the nonjudicial foreclosure was to foreclose on the property, not to induce a payment. He argued that, in passing the FDCPA, Congress understood that collecting debts and enforcing security interests were distinct concepts. Congress intended that persons enforcing security interests should be subject only to limited restrictions, and the combination of the general purpose and limited purpose definitions accomplished that by treating nonjudicial foreclosures as not being debt collection.
 
He did concede that a law firm seeking a deficiency judgment as part of a judicial foreclosure would be collecting a debt.
 
Federal government’s support. The U.S. government, arguing separately from the law firm, also argued that nonjudicial foreclosures are not debt collection. Assistant to the Solicitor General Jonathan C. Bond characterized this as resulting from a congressional compromise that would subject persons enforcing security interests to a ban only on a limited set of practices deemed to be unfair. The broader applicability asserted by the homeowner would upset that compromise, he argued.
The limited purpose definition made clear that Congress intended to regulate debt collectors and security interest enforcers separately, he said. Bond conceded, as had Shanmugam, that a security interest enforcer who also demanded payment would be a debt collector. However, he disagreed with the proposition that a sale of the property after repossession—or foreclosure—mattered. "If you are taking property to be used to satisfy a debt, it doesn’t matter whether you sell it or, indeed, whether anyone sells it," he said.
 
In Bond’s view, a nonjudicial foreclosure that complies with state law and does not include a payment demand is solely the enforcement of a security interest and not debt collection.
 
The case is No. 17-1307.
 
This article previously appeared in the Banking and Finance Law Daily.

Thursday, January 3, 2019

Creditor not liable for loan servicers’ RESPA loss-mitigation violations

By Katalina M. Bianco, J.D.

A mortgage loan creditor is not vicariously liable for its loan servicer’s violations of the Real Estate Settlement Procedures Act because the Act explicitly restricts liability to servicers, the U.S. Court of Appeals for the Fifth Circuit has decided. In what it termed a case of first impression in the federal appellate courts, the Fifth Circuit said that a creditor cannot be liable for a loan servicer’s failure to comply with the loss mitigation requirements of RESPA and Reg. X—Real Estate Settlement Procedures (12 CFR Part 1024). The RESPA ruling was given as an alternative to the court’s first choice—that the homeowner failed to describe an agency relationship between the bank and either of the servicers (Christiana Trust v. Riddle, Dec. 21, 2018, Elrod, J.).

Bank of America made a home-equity loan to a homeowner and later gave the servicing rights to Ocwen Loan Servicing. A subsequent assignee of the loan shifted the servicing rights to BSI Financial Services. When the assignee filed a foreclosure suit, alleging that the homeowner had not made her payments, the homeowner filed a third-party complaint against Bank of America and the two servicers claiming that she had filed a loss mitigation application that had not been considered as Reg. X required.

The homeowner’s claims were dismissed by the U.S. district court judge, and she appealed.

No agency relationship. Vicarious liability requires an agency relationship, the appellate court said, and the homeowner’s third-party complaint simply failed to describe such a relationship between Bank of America and either of the two servicers. A person who provides services under a contract is not necessarily an agent of the recipient of those services, the court pointed out. An agent acts under a principal’s control, while a contractor might not, and the homeowner had not claimed the bank had any control over the servicers’ actions.

No vicarious liability. Even if the homeowner had described an agency relationship, RESPA and Reg. X still would have protected the bank from any liability for the servicers’ violations, the court then said. While the statute and the regulation both impose loss-mitigation consideration duties, both explicitly restrict to servicers any liability for failing to carry out those duties.

Both the regulation and the statute place loss-mitigation compliance duties only on servicers, the court pointed out. Reg. X defines a servicer as a person who receives payments from the mortgagor and distributes those funds as required by the loan. The bank did not engage in those activities, so it was not a servicer, the court reasoned.

When Congress intended RESPA to apply more broadly, it used broader language, according to the court. For example, the act said that "no person" could accept kickbacks or unearned fees. However, the loss mitigation duties applied explicitly only to servicers. RESPA’s text "plainly and unambiguously" imposed liability only on servicers and rejected any vicarious liability for creditors, the court decided.

One member of the three-judge panel did not join in the RESPA determination because she felt the failure to describe an agency relationship was adequate to decide the case. However, the opinion added that, in the Fifth Circuit, alternative holdings are not obiter dictum; rather, they are binding precedent.

The case is No. 17-11429.

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