The following is a case update written by Dean T. Kirby, Jr. a member of the firm of Kirby & McGuinn, A P.C., analyzing a recent decision of interest:
In Mathieson v. Wells Fargo Bank, NA, 2021 WL 877698 (M.D. Fla. Mar. 9, 2021), a mortgage lender and loan servicer were sued under the federal Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. § 1692, et seq., based on a “loss mitigation letter” which set a deadline for the borrower to execute short sale papers. The foreclosure sale was conducted before that deadline expired. The U.S. District Court for the Middle District of Florida held that there was no FDCPA violation because the loan servicer was not a “debt collector” as defined by the FDCPA and in any case had not engaged in debt collection activity.
A copy of the opinion may be found here.
Plaintiffs Scott and Trudy Mathieson were borrowers who in 2016 defaulted in payments under their Florida home mortgage. The complaint named three defendants: (i) the mortgage holder Wells Fargo, Bank, N.A. as trustee in relation to a series of certificated mortgage-backed securities; (ii) PHH Corporation, the loan servicer; and (iii) Robert, Anschutz & Schneid, a law firm which settled the case and was dismissed.
A foreclosure action was commenced in Pasco County Florida by Ocwen, the previous loan servicer, and a judgment of foreclosure was entered in August, 2019. The foreclosure sale took place on March 3, 2020.
The complaint is based primarily on a letter from PHH (which succeeded Ocwen as servicer) dated February 10, 2020, referred to as the “loss mitigation letter.” This letter stated that it was a response to a “request for mortgage assistance.” It stated that the Mathiesons were conditionally eligible for alternatives to foreclosure, specifically a deed in lieu of foreclosure or a “short sale.” The letter enclosed additional documents that the Mathiesons would be required to execute in order to proceed with a short sale, including a listing agreement and purchase contract. It set a deadline of March 11, 2020 to submit those papers.
The loss mitigation letter included an expanded version of the “Mini-Miranda” language required by the FDCPA, viz., that “[t]his communication is from a debt collector attempting to collect a debt; any information obtained will be used for that purpose. . . .”
PHH was aware or became aware of the discrepancy between the scheduled March 3 foreclosure sale date and the March 11 deadline for submission of the loss mitigation papers, and it filed a motion in the foreclosure action requesting that the upcoming sale be cancelled. The motion stated that Wells Fargo was evaluating the Mathiesons’ “eligibility to participate in loss mitigation opportunities including a short sale of the subject property, or deed-in-lieu of foreclosure.” The motion stated that the Mathiesons had until March 11 to submit required papers. For some unexplained reason, the motion was denied and the sale proceeded as scheduled.
The Mathiesons sued the defendants in Florida state court. Wells Fargo removed the case to the United States District Court. The First Amended Complaint, filed in the District Court, alleged that PHH, as a third party debt collector, violated the FDCPA while both Wells Fargo and PHH violated the Florida analog to FDCPA, which is not confined to third party collectors. The District Court granted a motion to dismiss as to both defendants under Federal Rule of Civil Procedure 12(b)(6).
The Court analyzed whether PHH was a debt collector engaged in debt collection activity. It first examined the language of the loss mitigation letter and concluded that it “was not an attempt to collect a debt.” The Court noted that “[t]he letter does not demand payment or threaten consequences if payment is not made. The letter responds to inquiry from the Plaintiffs-debtors.” There followed a discussion of the Mini-Miranda warning, which did after all identify the communication as being from a debt collector. The Court found that this language was not dispositive as to whether the loss mitigation letter was itself debt collection activity. It determined that the “least sophisticated consumer” ( a standard embedded in the FDCPA) “would not comprehend that the loss mitigation letter was an attempt to collect a debt.”
The Mathiesons contended that statements made in an affidavit filed in support of the motion to postpone the foreclosure sale date was an FDCPA violation, arguing that it should have acknowledged that PHH had no right to foreclose. Also, the Mathiesons contended that PHH never actually intended stop the sale. The Court found that PHH still retained the legal right to foreclose, but that there was no “factual basis” to support the conclusory allegation that PHH did not intend to stop the sale. The Mathiesons further claimed that PHH did not go far enough in responding to the court’s ruling, and that its inaction induced them not to file their own motion or appeal. The Court found that there was no indication that the Florida judge would have reversed the ruling had a motion to reconsider been brought.
The Court’s conclusion that no debt collection activity took place had the effect of exonerating both PHH and Wells Fargo. The Court further held PHH was in any case not a third party “debt collector” as defined in the FDCPA. The opinion cites authority to the effect that an entity that becomes a mortgage loan servicer before default is not a debt collector simply by virtue of enforcement efforts undertaken after default occurs. In this case, PHH was the successor by merger to Ocwen, and so could not be considered to have become the new servicer after default.
You may wonder why the Florida court would deny a motion by the foreclosing lender to cancel a scheduled judicial foreclosure sale so that it could consider a request by the borrower for loss mitigation. It appears that the moving papers actually informed the Florida court of the March 11 deadline for submission of papers. The motion was characterized by the District Court as “concise.” Either it was not sufficiently clear on the face of the motion that PHH had placed itself in an awkward position, or the Court understood it all and decided to do neither PHH, nor the Mathiesons, any favors.
The reasoning of the opinion is based on parsing the language of the loss mitigation letter and affidavit, stating that these could not be collection activity because no demand for payment of the mortgage debt was made. One could argue, however, that any action to enforce a lien securing a debt is aimed ultimately at collecting the debt, and that the “least sophisticated consumer” who didn’t understand things like a deed in lieu and a short sale would probably at least perceive that foreclosure could be avoided if the mortgage were paid.
The recent Supreme Court case of Obduskey v. McCarthy & Holthus LLP, 139 S. Ct. 1029, 203 L. Ed. 2d 390 (2019), not cited in the Mathieson opinion, held that a law firm, the activities of which were strictly confined to conducting a nonjudicial foreclosure of a mortgage, was not engaged in debt collection under the FDCPA. The opinion in Obduskey makes clear, however, that a party which strays from engaging strictly in lien enforcement activities and tries to induce the consumer, through persuasion or threats, to pay the debt, will have sailed out of the safe harbor. This holding makes the applicability of the FDCPA to mortgage foreclosure activities very fact-dependent and may discourage those directly engaged in enforcing liens by foreclosure from engaging in dialog with the borrower about making arrangements to pay the debt.
Given what some would characterize as a pro-borrower legal climate, it may seem odd that a loan servicer could assure the borrower that it had time to submit loss mitigation papers and then pull the rug out by foreclosing early with no resulting legal consequences. Weren’t there other remedies available in the legal arsenal? Weimer v. Nationstar Mortg., LLC, 47 Cal. App. 5th 341, 260 Cal. Rptr. 3d 712 (2020) held that a lender may have tort liability for negligence in handling an application for a loan modification. The California Supreme Court has granted review of Weimer.
These materials were written by Dean T. Kirby, Jr. a member of the firm of Kirby & McGuinn, A P.C., located in San Diego, California. Mr. Kirby is a member of the ad hoc group and a member of the Commercial Transactions Committee of the Business Law Section. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.