Last month, I wrote about the irreconcilable differences between the RESPA “hello” letter requirement and the FDCPA debt validation notice requirement. Essentially, when a loan is in default at the time of a servicing transfer, a servicer oftentimes finds itself in the extremely uncomfortable position of choosing which statute to be sued under.
The intent of this article is to highlight the confusion caused by the FDCPA concerning the provision of reinstatement and payoff quotes to borrowers who have defaulted on their mortgage loans. Similar to the “pick your poison” of getting sued under RESPA or FDCPA mentioned above, the FDCPA and the federal appellate courts' conflicting interpretations of the statute have placed the mortgage industry between a “rock and a hard place” once again.
For illustrative purposes, let's review case law from the Eleventh and Second Circuits. We'll start with Prescott v. Seterus, 635 Fed. Appx 640 (11th Cir. 2015), which concerned a servicer's efforts to provide a meaningful reinstatement quote to a borrower who had defaulted on his mortgage loan.
HOW PRESCOTT HARMS THE CONSUMER
In Prescott, the borrower fell behind on his mortgage payments in August 2012. Seterus acquired the servicing rights to the loan October 1, 2012. Soon thereafter, Seterus referred Prescott's loan to a Florida firm for foreclosure. In August 2013, Prescott asked Seterus for the amount necessary to reinstate his loan. On September 4, 2013, Seterus sent Prescott a reinstatement letter stating that the reinstatement amount was $15,569.64 and this quote was good through September 27th, or 23 days from the date of the letter. The quote included $3,175 of estimated attorneys' fees and costs.
Prescott fully reinstated the loan on September 26th, and on November 14th, Seterus refunded Prescott the $3,175 of estimated attorneys' fees and costs because those items had not been incurred as of the date of Prescott's reinstatement. A week later, Prescott sued Seterus for, among other things, violations of FDCPA Sections 1692e(2) and 1692f(1).
One of the primary objectives of the FDCPA is to ensure that debt collectors, when communicating with debtors, provide accurate information about the amount owed. For example, Section 1692g requires that the amount of debt be accurately stated in the so-called debt validation notice; Section 1692f(1) prohibits a debt collector from collecting an amount not expressly allowed by the contract, which essentially is the promissory note and mortgage; and 1692e(2) prohibits a debt collector from misrepresenting the amount of the debt in any communication with the debtor.
As stated above, Prescott alleged that Seterus violated, among other things, Section 1692f(1). With respect to this claim, the Court analyzed the terms of the mortgage and determined that the mortgage did not expressly permit Seterus to charge and collect estimated attorneys' fees and costs, but rather only attorneys' fees and costs that had actually been incurred. For this reason, the Eleventh Circuit concluded that Seterus violated Section 1692f(1) when it included the estimated attorneys' fees and costs in the reinstatement quote.
So, in a nutshell, the Eleventh Circuit has concluded that the FDCPA strictly prohibits estimating fees and costs to be incurred when providing a reinstatement quote to a borrower. Why is this holding a big deal? To understand the ramifications of the decision, it is important to understand the mortgage servicing industry, which, as a side note, is very different from the unsecured debt collection industry. When a mortgage becomes seriously delinquent, the servicer must make advances for a wide variety of items in order to protect the mortgaged property pursuant to investors' requirements, such as Fannie Mae and Freddie Mac (hereafter the “GSEs”). Advances that must be made include premiums for hazard insurance, real estate taxes, property inspection fees, attorneys' fees and court costs to name a few.
The Eleventh Circuit's conclusion in Prescott is understandable in light of the less than specific language that exists in the GSE uniform mortgage. Unfortunately, however, the Court ignores, or doesn't fully appreciate, the hardship placed on consumers as a result of a strict interpretation of Section 1692f(1) and the uniform mortgage. In light of the high dollar advances that must be made pursuant to GSE guidelines when a borrower defaults, a servicer servicing loans in Alabama, Georgia and Florida really has no choice, as a result of Prescott, but to provide a very limited timeframe for borrowers to reinstate, or run the very real risk of not getting reimbursed for advances.
Per Prescott, the reinstatement quote must be accurate on the date of the quote and must not include any estimation of fees and costs that are likely and anticipated in the following few weeks. Presumably, in order to comply with Prescott, servicers provide reinstatement quotes that are only good for 10 to 14 days, at most. Such a tight timeframe gives a borrower very little time to reinstate. Once the reinstatement quote expires, a new quote must be requested by the borrower and the amount necessary to reinstate increases, not only due to additional interest, but also as a result of the advances made relating to the items referenced above. The result: fewer loan reinstatements and more foreclosures and bankruptcy filings; clearly, not the result Congress intended, and probably not what the Eleventh Circuit intended.
THE SECOND CIRCUIT ACKNOWLEDGES FDCPA COMPLIANCE CHALLENGES
Other Circuits have acknowledged the counter-productive consequences resulting from prohibiting any estimation of fees and costs to borrowers suffering from a mortgage default. In Carlin v. Davidson Fink, LLC, 852 F.3d 207 (2nd Cir. March 29, 2017), the court clarified its holding stating that it is “not hold[ing] that a debt collector may never satisfy its obligation under Section 1692g by providing an amount due including expected fees and costs” (emphasis added). The Court provided further that “a [payoff] statement is incomplete where, as here, it omits information allowing the least sophisticated consumer to determine the minimum amount she owes at the time of the notice, what she will need to pay to resolve the debt at any given moment in the future and an explanation of any fees and interest that will cause the balance to increase” (emphasis added). With this language, the Carlin Court is suggesting to the mortgage industry that failure to include future or expected fees may actually be deceptive through the lens of an unsophisticated consumer, and therefore such omission in payoff and reinstatement quotes may be a violation of the false and deceptive representation prohibitions set forth in Section 1692e(2).
The Carlin Court reminds us that the Second Circuit has adopted safe harbor language, much like the Seventh Circuit in Miller v. McCalla Raymer, 214 F.3d 872 (7th Cir. 2000), to assist mortgage servicers and other debt collectors with the challenges caused by the FDCPA when trying to help borrowers reinstate their loans. Put another way, both the Second and Seventh Circuits recognize that the FDCPA, at least as it relates to the mortgage industry, is so broken that both Circuits felt compelled to create judicial safe harbor language to help the industry weather the storms caused by application of the FDCPA to mortgage servicing.
The obvious solution is to amend the FDCPA to exclude the mortgage industry from its reach. The FDCPA's primary purpose is to regulate communications between debt collectors and debtors. In 2014, the CFPB promulgated over 1,000 pages of new rules for mortgage servicers to follow in connection with their communications with delinquent borrowers. Based on the issuance of these countless new rules, regulating mortgage servicers' communications with borrowers through the FDCPA has become obsolete, overlapping and has created unnecessary ambiguity in the law.
If amending the FDCPA is unrealistic since it would require congressional action, there is another path forward. The Courts can view (and should view) the FDCPA in a light most favorable to the debtor, and adopt a common sense approach to FDCPA interpretation and purpose. It is logical and justified for courts to conclude that the FDCPA, and the broad property protection authorizations set forth in the GSE uniform mortgage, do, in fact, permit the inclusion of anticipated fees and costs in reinstatement quotes. Adopting this interpretation will remove the handcuffs created by Prescott, and similar case law, and allow mortgage servicers to better assist delinquent borrowers reinstate their loans. Such a result is a win for individual consumers, for families, for communities and a win for the nation as a whole.
On the other hand, without statutory amendment or resolution of the conflict among the Circuits, the chaos and misfortune continues.