Federal Regulatory and Texas Judicial Update

Federal Regulatory and Texas Judicial Update

The Bureau of Consumer Financial Protection (“CFPB”) issued an interpretive rule under the Fair Debt Collection Practices Act (“FDCPA”) to clarify the interaction of the FDCPA and specified mortgage servicing rules in Regulations X and Z to cover confirmed successors in interest whether or not a successor has assumed the mortgage loan obligation, effective April 19, 2018.  The U.S. Court of Appeals for the Fifth Circuit recently affirmed a lower court decision that a loan modification discussion between borrowers and a mortgage servicer did not constitute a debt collection activity under the Texas Debt Collection Act (“TDCA”).


81 FEDERAL REGISTER 71977 CFPB Interpretative Rule:  Safe Harbor from Liability Under the FDCPA for Communicating with Successors in Interest


While many mortgage servicers are not subject to the FDCPA, mortgage servicers that acquired a mortgage loan at the time that it was in default are subject to the FDCPA with respect to that mortgage loan.


The FDCPA generally prohibits debt collectors from communicating with third parties in connection with the collection of a debt.  However, it does permit debt collectors to communicate with a person who is a consumer and states that the term “consumer” includes the consumer’s spouse, parent (if the consumer is a minor), guardian, executor, or administrator.  The CFPB indicated that this is not an exhaustive list.


The interpretive rule states that the term “consumer” for purposes of the FDCPA also includes “confirmed successors in interest” as defined by Regulation X and Regulation Z.  Given their relationship to the obligor, the mortgage loan, and the property securing the mortgage loan, the CFPB concluded that confirmed successors in interest are the types of individuals with whom a servicer needs to communicate about the mortgage loan.  A servicer’s failure to provide information to a successor in interest about the status of a mortgage loan or to evaluate the successor in interest for available loss mitigation options could result in unnecessary foreclosure and loss of the successor in interest’s ownership interest.


The CFPB indicated therefore that servicers subject to the FDCPA with respect to a mortgage loan do not violate the FDCPA’s prohibition on communicating with third parties by communicating with a confirmed successor in interest about a mortgage loan secured by property in which the confirmed successor in interest has an ownership interest.


Clark v. Deutsche Bank Nat’l Trust Co., 2018 U.S. App. (LEXIS 1484)


The Clarks (“Borrowers”) defaulted on their home equity loan and attempted to modify their loan to help remedy the default.  During this process, the Borrowers received a letter from Wells Fargo indicating that they were being reviewed to determine whether they were eligible for the Home Affordable Modification Program (“HAMP”) but were subsequently notified that they failed to qualify because Wells Fargo is prohibited from adjusting the original terms of the mortgage due to state law restrictions under Article 16, Section 50(a)(6) of the Texas Constitution.


The Borrowers subsequently filed a lawsuit against Deutsche Bank National Trust Company and Wells Fargo Bank, N.A. (the “Creditors”) asserting violations of the TDCA, among other things, alleging that the Creditors used false representations or deceptive means to collect a debt and obtain information concerning a consumer.  In particular, Borrowers allege that Creditors “deceptively instructed and encouraged” Borrowers to apply for the HAMP loan modification and made affirmative statements about the loan and a HAMP loan modification even though the HAMP loan modification was not available to Borrowers.


The U.S. Court of Appeals for the Fifth Circuit indicated that the TDCA prohibits debt collectors from “using any other false representation or deceptive means to collect a debt or obtain information concerning a consumer”; but to maintain a cause of action under this “catchall provision” of the TDCA, the debt collector must have made an affirmative statement that was false or misleading.  The Court affirmed the judgment of the lower court and held that the Creditors’ statements were not an affirmative statement upon which relief may be granted.


The Court further indicated that communications in connection with the renegotiation of a loan do not concern the collection of a debt, but instead, relate to its modification and thus they do not state a claim under the TDCA.