Loss Mitigation: Foreclosure not “Debt Collection”

QUESTION

I’ve got a feeling that my question is kind of off the beaten path, but here goes! I am the General Counsel of a mid-sized bank in the mid-west. I am concerned about how to construe whether loss mitigation may be considered “debt collection” within the FDCPA. Briefly put, is the processing of loss mitigation options considered “debt collection” based on the FDCPA?

ANSWER

Your question is not as off the beaten path as you think. After all, this is the kind of issue that comes up quite a lot, especially in litigation. I will give you one example from last year.

In that case, a federal district court in Minnesota considered whether the processing of loss mitigation options falls within the meaning of “debt collection” within the FDCPA. The case was  Heinz v. Carrington Mortgage Services, 2019 U.S. Dist. (D. Minn. Nov. 19, 2019).

Come with me as I walk you through the basic outline!

In 2008, Heinz borrowed $247,344 from Countrywide Bank, secured by a mortgage on his home. Heinz fell behind on his mortgage payments on a couple of occasions and obtained loan modifications to bring him current. In 2016, he again defaulted and applied for loss mitigation assistance with Bank of America (BOA), the assignee of his loan.

In July 2017, Carrington began to service the loan. Carrington demanded that Heinz produce a loss mitigation package to prevent a foreclosure sale. Heinz sought assistance from the Minnesota Attorney General’s office, which represented him going forward. To avoid foreclosure, Heinz submitted his first loss mitigation application to Carrington on August 3, 2017. On August 8, Carrington acknowledged receipt of the application and requested more documentation. Additional contacts occurred over the next two months until the application was cancelled on October 8, 2017.

On October 12, 2017, Heinz submitted a second request for mortgage assistance to Carrington. More back and forth occurred into November, as Carrington determined that the application remained incomplete, although Heinz, to the contrary, alleged that Carrington told him his application was complete and had been sent to underwriting.

As they say at the track, opinions make horse races!

Carrington proceeded with the foreclosure sale on November 14, 2017, where BOA bought the property for $225,120, subject to a 6-month redemption period. One day after the redemption period expired, Carrington declined to rescind the sale, allegedly because the documentation for mortgage assistance had not been received.

In June 2018, Heinz sued Carrington, alleging, among other things, that Carrington had violated the Fair Debt Collection Practices Act (FDCPA) by falsely assuring Heinz that the sheriff’s sale would be postponed and by foreclosing on the property in violation of Minnesota’s dual-tracking statute. His claim covered pre- and post-foreclosure sale representations that the loan modification was under review and sent to underwriting and all documentation for loss mitigation applications was not received.

But this is how it came to shake out: the court granted summary judgment for Carrington. The lien foreclosure activities did not constitute “debt collection” under the FDCPA. And Heinz failed to point to any case law in the 8th Circuit suggesting that statements about mortgage foreclosures or loss mitigation applications related to “collection of a debt” within the meaning of the FDCPA. Furthermore, Heinz presented no evidence from which a reasonable jury could conclude that Carrington’s communications or conduct were in connection with the “collection of a debt” as the FDCPA requires.

None of Carrington’s alleged misrepresentations related to specific repayment terms. The challenged communications did not discuss the terms of the underlying debt, demand payment for the debt, or threaten additional collection proceedings.

Instead, Carrington was “actively engaged in a process to dispossess Mr. Heinz of the Property” and threatened foreclosure if Carrington did not receive the necessary documentation. These actions could only be considered “enforcement” of security interests pending the foreclosure sale. The “animating purpose” of the communications and conduct could not be appropriately described as seeking to collect the underlying debt.

Thus, the court, accepting Heinz’s allegations as true, acknowledged that “Mr. Heinz fully cooperated with Carrington to try to stop it from foreclosing on the Property. As such, Carrington’s actions during the foreclosure process…might appropriately be described as unfair….[But b]ecause the record does not suggest that Carrington sought to collect the underlying debt…, the law requires the Court to find in Carrington’s favor.”

Now, here is the point where you might wonder why the court never mentioned the U.S. Supreme Court’s decision in Obduskey v. McCarthy & Holthus LLP, 2019 (Mar. 20, 2019), which held that one principally involved in “the enforcement of security interests” is not a debt collector, except for the purpose of 15 U.S.C. § 1692f(6), the FDCPA provision that prohibits a “debt collector” from “[t]aking or threatening to take any nonjudicial action to effect dispossession or disablement of property if (A) there is no present right to possession of the property…; and (B) there is no present intention to take possession of the property; or (C) the property is exempt by law for such dispossession or disablement.”

I would point out that the case I’ve outlined involved the definition of “debt collection,” not the definition of “debt collector,” although similar policy concerns probably underly each holding.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group