Wednesday, April 3, 2019

5th Cir: Bank, directors could not sue FDIC over enforcement proceeding irregularities

A state bank and its directors could not challenge FDIC enforcement orders by filing a suit claiming constitutional violations. The only avenue available to attack the proceedings was to appeal the orders in the U.S. Court of Appeals.
A federal district court did not have jurisdiction over a suit filed by a New Orleans community bank and its directors who were unhappy with two Federal Deposit Insurance Corporation enforcement actions and the resulting cease-and-desist orders and civil money penalties, the U.S. Court of Appeals for the Fifth Circuit has decided. Under the Federal Deposit Insurance Act, only the U.S. appellate courts have jurisdiction over challenges to enforcement actions (Bank of Louisiana v. FDIC, March 28, 2019, Duncan, S.).
Enforcement actions. The FDIC brought two administrative enforcement actions against Bank of Louisiana and three directors beginning in 2013:
  • The first claimed that the directors had caused the bank to violate the regulation on loans to insiders. The FDIC adopted the administrative law judge’s recommendation that each director pay a $10,000 civil penalty.
  • The second, which was brought less than one month after the first, was broader. It charged that the bank had violated the Bank Secrecy Act, Electronic Funds Transfer Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Home Mortgage Disclosure Act, and National Flood Insurance Program. The FDIC adopted the ALJ’s recommendation of a $500,000 penalty and a cease-and-desist order. 
The order entered in the first enforcement proceeding was appealed to the Fifth Circuit, which affirmed the FDIC’s decision. The second also was appealed, but eventually was returned to the FDIC due to problems with the constitutionality of the ALJ’s appointment.
However, while the first action was on appeal and the second was being considered by the FDIC board, the bank and directors sued the FDIC in the federal district court. The suit alleged that the FDIC had violated equal protection rights by targeting the bank due to the bank president’s age and had violated due process rights by preventing the bank from offering some evidence and restricting the president’s ability to talk with his attorney. The appellate court noted that these claims had been considered and rejected by both the ALJ and the FDIC board.
Restricting court jurisdiction. The appellate court began its analysis by observing that, in most situations, Congress has the authority to decide what cases the federal courts can hear and under what conditions those cases can be considered. While civil suits usually are heard first by the U.S. district courts, Congress can "leapfrog" the district courts by sending claims through an administrative process and providing for direct appeal to the U.S. appellate courts.
Congress can establish such a process either implicitly or explicitly. The issue here, the court said, was whether the Federal Insurance Act (at 12 U.S.C. §1818) had done so by implication. That would be decided by answering two questions: First, did the statutory scheme of the FDI Act show that Congress intended to preclude district court jurisdiction? Second, were the claims presented by the suit of the type that Congress intended to fall within that statutory scheme?
Congressional intent. There was no real question about whether Congress intended to preclude federal district court jurisdiction over claims against the FDIC that arose from enforcement proceedings. In fact, the bank and directors conceded the issue. The statutory language that "no court shall have jurisdiction to affect by injunction or otherwise the issuance or enforcement or any notice or order [under the section], or to review, modify, suspend, terminate, or set aside any such notice or order" (12 U.S.C. §1818(i)(1)) "virtually compels that concession," the court said.
The question then was whether the claims raised by the bank and directors were of the type that Congress intended would be covered by the statutory scheme.
Nature of the claims. The Supreme Court set the factors for answering that question in Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994), the court said. It would be assumed that Congress did not intend to preclude district court jurisdiction if:
  1. all meaningful judicial review would be precluded;
  2. the claims were "wholly collateral" to the statutory review process; and
  3. the claims were not within the FDIC’s expertise.
The three Thunder Basin factors made clear that the district court did not have jurisdiction over the suit.
The FDI Act scheme allowed meaningful judicial review of FDIC board orders, the court pointed out. In fact, the board considered the constitutional claims and the Fifth Circuit considered them on review. The complaint that limits on the bank’s discovery prevented meaningful review were unavailing because the bank and directors had been able to develop an adequate record, according to the court.
The equal protection and due process claims were not collateral to the enforcement proceedings, the appellate court continued. Rather, they arose directly from claims of irregularities in those proceedings. Even if the constitutional claims were substantively collateral to the FDIC’s allegations about how the bank was operated, they were not wholly collateral, the court pointed out.
Finally, the FDIC’s expertise included the constitutional claims. Why the FDIC chose to bring its enforcement proceedings and how those proceedings were conducted would be affected by the agency’s banking expertise, the court said.

This article previously appeared in the Banking and Finance Law Daily.

Thursday, March 21, 2019

U.S.: Law firm engaged in nonjudicial foreclosure not a debt collector

By Richard A. Roth, J.D.

A law firm engaged in a nonjudicial foreclosure on a consumer’s residence is not a debt collector under the Fair Debt Collection Practices Act, the Supreme Court has unanimously decided. The text of the FDCPA, an apparent congressional intent to avoid interfering with state foreclosure proceedings, and the Act’s legislative history all show that, for most purposes, a business that has the enforcement of security interests as its principal purpose is not included in the general definition of "debt collector," the Court decided (Obduskey v. McCarthy & Holthus LLP, March 20, 2019, Breyer, S.).

The decision affirms a judgment by the U.S. Court of Appeals for the Tenth Circuit that rejected the consumer’s suit.

Foreclosure process. When a homeowner fell behind on his mortgage payments, the loan servicer hired the law firm of McCarthy & Holthus to carry out a nonjudicial foreclosure under Colorado law. The first step in that process was a state-law mandated 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.

The Tenth Circuit agreed with the law firm that it was not a debt collector, and thus not subject to the FDCPA, because it had not demanded any payment from the homeowner. The nonjudicial foreclosure could not result in a deficiency judgment against the consumer, the court pointed out. That could only happen in a separate suit. "[E]nforcing a security interest is not an attempt to collect money from the debtor," the court said.

What is a debt collector? The FDCPA’s definitions of "debt collector" are a bit confusing. In 15 U.S.C. §1692a, the Act says generally that a debt collector is anyone who either is in a business that has, as its principal purpose, the collection of debts, or who regularly collects or attempts to collect debts. However, the Act then adds that for the purposes of §15 U.S.C. §1692f(6)—which addresses the improper taking or threatening of nonjudicial actions to foreclose on property—a person in a business that has, as its principal purpose, enforcing security interests also is a debt collector.

The homeowner argued that this last, specific provision meant the law firm was a debt collector.

The Supreme Court disagreed. The added provision does not mean that a person in the business of enforcing security interests is a debt collector under the general definition; rather, it means that such a person is a debt collector for the specific purpose of the impermissible threat part of the FDCPA, but for no other part.

Meaning of the FDCPA. According to the Court’s opinion, authored by Justice Breyer, the result was compelled by the text of the FDCPA.

If the Act gave only the general definition of "debt collector," the law firm would have been included, the opinion said. A loan to buy a home is an obligation to pay money; the mortgage secures that obligation; a foreclosure sells the property to repay that debt; and a company that engages in nonjudicial foreclosures would be collecting that debt.

It was irrelevant that the payment was not being collected from the consumer directly, the opinion added, as the FDCPA applies to the collection of debts indirectly.

However, the opinion asked, if a foreclosure agent were to be deemed a debt collector under the general definition, what was the purpose of the specific definition that applies to impermissible threats in foreclosures? And, more explicitly, why does the specific definition say that, for that part of the Act, "debt collector" also includes a foreclosure agent?

The only way to give meaning to the entire definition was to construe the specific definition as adding something to the general definition, Justice Breyer concluded. Therefore, a company that engages in nonjudicial foreclosures is, in general, not a debt collector subject to the FDCPA. However, it is subject to the FDCPA’s ban on impermissible foreclosure threats and actions.

Supporting arguments. The Court noted two additional arguments in favor of its decision. First, Congress might have wanted to treat nonjudicial foreclosures differently from other debt collection activities in order to avoid disrupting established state foreclosure regimes. These state laws often include significant consumer protection aspects that could be seen as violating the FDCPA.

The legislative history of the FDCPA also supports the decision, the opinion said. When the Act was being considered by Congress, two conflicting versions were considered. One would have included nonjudicial foreclosures fully, while the other would have excluded them completely. The version that was passed "has all the earmarks of a compromise" that makes clear what Congress settled on.

Consumer’s assertions rejected. The Court considered, but rejected, a series of arguments made by the consumer.

First, the imperative to find meaning in all of the FDCPA’s text would not be satisfied by interpreting the special definition as applying to repossession agents. The Act spoke of enforcing all security interests, not just personal property interests. If Congress intended to include only "repo men," it would have made that clear by limiting the specific definition to the repossession of personal property.

Second, it is true that the FDCPA includes venue requirements on debt collection suits, the Court agreed. However, a provision of the Act that applies in litigation does not affect the application of the Act to nonjudicial activities. The opinion then noted that the Court was deciding only whether those engaged in nonjudicial foreclosures are debt collectors; those carrying out judicial foreclosures might be debt collectors, particularly since a judicial foreclosure includes the possibility of a deficiency judgment against the consumer.

Next, the Court said that the law firm’s mailing of notices to the consumer did not change the result. By sending the notices, the firm was not taking steps that went beyond foreclosing; rather, it was carrying out steps required by state law as part of the foreclosure process.

The Court concluded by adding that if the decision created a loophole that foreclosure agents could exploit to engage in the various abusive collection tactics the FDCPA bans, state laws often already addressed that danger. If more protection was needed, Congress would have to amend the Act. The Court could only enforce the Act as Congress had written it.

Concurring opinion. Justice Sotomayor’s concurring opinion first noted that Justice Breyer’s opinion "makes a coherent whole of a thorny section of statutory text." However, she also said that a nonjudicial foreclosure would be the indirect collection of a debt under the general definition.

The need to give meaning to all of the Act’s text led her to agree with the Court’s decision, she said, but "all the same, this is too close a case for me to feel certain that Congress recognized that this complex statute would be interpreted the way that the Court does today." Congress still could act to extend the FDCPA’s consumer protections to all debt collection activities.

Justice Sotomayor also reinforced that part of the Court’s opinion saying nonjudicial foreclosure agents were not being given "a license to engage in abusive debt collection practices." This decision should be seen as applying only to a foreclosure agent’s good-faith efforts to comply with state laws while actually carrying out a nonjudicial foreclosure, she wrote.

The implication is that, in Justice Sotomayor’s belief, abusive collection tactics carried out under the guise of a nonjudicial foreclosure, with no intent actually to foreclose, would violate the FDCPA.

The case is No. 17-1307.

This article previously appeared in the Banking and Finance Law Daily.

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.

For more information about the CFPB and the MLA, subscribe to the Banking and Finance Law Daily.

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.

For more information about RESPA and Reg. X court developments, subscribe to the Banking and Finance Law Daily.

Friday, December 21, 2018

FDIC closes year with series of regulatory reform adoptions and proposals

By Andrew A. Turner, J.D.

The Federal Deposit Insurance Corporation closed the year by issuing a variety of rulemaking adoptions and proposals, some in concert with other regulators. Highlights are listed below.

Brokered deposits. The FDIC took two actions related to brokered deposits. It amended its regulations on brokered deposits and interest rate caps to except a capped amount of reciprocal deposits from being treated as brokered deposits for certain banks. The agency also, through an Advance Notice of Proposed Rulemaking, asked for information to be used in a broader review of brokered deposit and interest rate cap rules.

Current expected credit losses implementation. The Office of the Comptroller of the Currency, Federal Reserve Board, and FDIC have revised regulatory capital rules to address changes to credit loss accounting under a new accounting standard, including banking organizations’ implementation of the current expected credit losses methodology (CECL). Banking organizations have been given the option to phase in over a three-year period the day-one adverse effects of CECL on the banking organization’s regulatory capital ratios.

The final rule also revises the agencies' stress testing rules and regulatory disclosure requirements to reflect CECL. Conforming changes were made to other regulations that reference credit loss allowances. The final rule is effective on April 1, 2019, but a banking organization may choose to adopt the final rule starting as early as first quarter 2019.

Volcker Rule restriction easing. The federal banking, securities, and commodities regulatory agencies are proposing changes to their Volcker Rule regulations that will exclude small banks with limited trading activities and permit some investment advisors to share a name with a hedge or private equity fund they advise.

Stress test requirements. The FDIC and OCC are proposing to amend their stress test regulations to: increase the asset threshold to $250 billion, up from the current $10 billion; reduce the requirement for annual tests; and reduce the necessary scenarios to two, down from the current three.

Deposit insurance assessment system. The FDIC issued a proposal that would amend its deposit insurance assessment regulations to apply the community bank leverage ratio (CBLR) framework to the deposit insurance assessment system. The primary objective is to incorporate the alternative measure of capital adequacy established under the CBLR framework into the current risk-based deposit insurance assessment system in a manner that: (1) maximizes regulatory relief for small institutions that use the CBLR framework; and (2) minimizes increases in deposit insurance assessments that may arise without a change in risk.

To assist banks in understanding the impact, the FDIC plans to provide on its website a spreadsheet calculator that estimates deposit insurance assessment amounts under the proposal.

Management interlocks. The federal banking regulatory agencies are proposing to change their management interlock rules to ease the burden on community banks. Currently, an individual who has a management position or is a director at an institution with more than $2.5 billion in assets cannot hold a comparable position at an unaffiliated institution with more than $1.5 billion in assets. The proposal would increase both thresholds to $10 billion.

For more information about FDIC regulatory actions, subscribe to the Banking and Finance Law Daily.

Tuesday, December 18, 2018

Debt collector’s ‘validation notice’ placement in letter did not violate FDCPA

By Thomas G. Wolfe, J.D.

In a December 2018 opinion, a three-judge panel of the U.S. Court of Appeals for the Seventh Circuit ruled that a debt collector’s placement of its “validation notice” in a collection letter to a consumer did not overshadow the consumer’s rights under the federal Fair Debt Collection Practices Act (FDCPA), nor did the letter misrepresent the importance of the validation notice required by the FDCPA. The consumer had claimed that the collection letter to her violated the FDCPA because the letter stated that “additional important information” was on the back of the first sheet of the letter, but the consumer-rights validation notice appeared on the top of the second sheet of the letter. In affirming the dismissal of the consumer’s proposed class-action lawsuit (O’Boyle v. Real Time Resolutions, Inc.), the Seventh Circuit panel determined that, from the standpoint of an “unsophisticated consumer,” the collector did not provide the validation notice in a manner that could be construed as false, deceptive, misleading, or confusing in violation of the FDCPA.

Further, the federal appellate court upheld the lower court’s denial of the consumer’s request to amend her complaint, determining that the consumer’s proposed amendments would not transform her original claim “into the realm of plausibility” and would cause “undue delay and unfair prejudice” to the debt collector.

Collection letter. In April 2017, Real Time Resolutions, Inc. (RTR), a debt collector, sent its first letter to the consumer to collect an alleged credit-card debt from her. In the middle of the front sheet of the first page, the letter communicated that this “is an attempt to collect a debt, and any information obtained will be used for that purpose.” Farther down on the front sheet, a box directed the consumer to view the reverse side of the first sheet, stating “Please see the back of this page for additional important information regarding this account.”

The back side of the first sheet of the letter provided information about particular consumer-rights notices in 10 states, including the consumer’s home state of Wisconsin, and prominently indicated that the applicable listing “is not a complete list of rights consumers may have under state and federal law.” Then, on the top front of the second sheet (page 2) of the collection letter, the FDCPA-required validation notice appeared: “Unless you notify this office within 30 days after receiving this notice that you dispute the validity of this debt or any portion thereof, this office will assume this debt is valid. If you notify this office in writing within 30 days of receiving this notice, this office will obtain verification of the debt or obtain a copy of a judgment if applicable and mail you a copy of such verification or judgment. If you make a written request to this office within 30 days after receiving this notice, this office will provide you with the name and address of the original creditor, if different from the current creditor.”

According to the Seventh Circuit’s opinion, the text of RTR’s validation notice “is clear, prominent, and readily readable. The font is normal in shape and size—essentially the same font as most of the letter.” Still, as pointed out by the court, while the front of the first page directs the reader to the back of that page for “additional important information,” that additional important information does not include the validation notice, which appears instead on the front top of the second page.

Complaint. In her proposed class action against RTR, the consumer alleged that the debt collector’s letter would mislead “the unsophisticated consumer” by telling the reader that important information was on the back of the first page, but instead providing the FDCPA-required validation notice on the front of the second page. According to the complaint, the letter from RTR violated the FDCPA (15 U.S.C. §§ 1692e and 1692g) by: “overshadowing” the consumer’s FDCPA rights; (ii) failing to communicate her FDCPA rights effectively; (iii) misdirecting a consumer’s attention away from the validation notice; and (iv) causing the misdirection to falsely and misleadingly represent that the validation notice was unimportant.

After the federal trial court declined to certify the proposed class, dismissed the FDCPA claims, and refused the consumer’s request to amend her complaint, the consumer appealed to the Seventh Circuit.

FDCPA provisions. Under section 1692e of the FDCPA, a debt collector is prohibited from using any “false, deceptive, or misleading representation or means in connection with the collection of any debt.” Meanwhile, section 1692g of the FDCPA requires debt collectors to notify consumers of their validation rights and sets forth the rules pertaining to that notification.

Court’s ruling. After noting these applicable FDCPA provisions, the Seventh Circuit asserted, “The FDCPA does not say a debt collector must put the validation notice on the first page of a letter. Nor does the FDCPA say the first page of a debt-collection letter must point to the validation notice if it is not on the first page. Nor does the FDCPA say a debt collector must tell a consumer the validation notice is important. Nor does the FDCPA say a debt collector may not tell a consumer that other information is important.”

In applying the pertinent “unsophisticated consumer” standard in the case, the court noted that an “unsophisticated consumer can be expected to read page two of a two-page collection letter.” In the court’s view, the scanning of the material on the reverse side of page one of the letter was a temporary “speed bump, not a road barrier,” to the validation notice at the top of page two; moreover, the validation notice itself was a “continuation of the letter.” The Seventh Circuit agreed with the lower court that “a consumer who reads the front and back of the first page of a short letter and then completely disregards the second page has not read the letter with care.”

Underscoring that RTR’s validation notice still occupied “a prominent place” in the letter even though it did not appear on the reverse side of page one, the court determined that the collector did not imply that the validation notice was unimportant by referencing other important information on the reverse side. Indeed, the reverse side of the first page discussed the consumer’s rights under Wisconsin law, which was pertinent to the consumer, and communicated that it was not a complete list of all rights consumers might have under federal law. Contrary to the consumer's FDCPA claims, “not even a significant fraction of the population would be misled” by RTR’s collection letter, the court concluded.

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