What a Debt Collector Must, Must Not and Would Be Wise to State in Debt Collection Communications

Recent federal court opinions have raised concerns about what debt collectors should and should not tell consumers in debt collection communications.  It may now no longer be lawful to include unearned expenses that may come due after the date of the communication in a collection communication in three states, while it may be lawful to do so in four jurisdictions.  In three states it may be unlawful to exclude a statement that there may be presently unearned expenses that may become due after the date of the communication.  In at least one other it may be sufficient simply to state the total amount due as of a date certain, ignoring altogether that additional expenses may be due by the time the consumer tenders payment.

Estimated or Anticipated Charges

Common practice has been to provide reinstatement and payoff letters describing anticipated or estimated fees and costs that may be incurred by the “good through” date.  A line of cases in the Third Circuit (covering Delaware, New Jersey, Pennsylvania and the Virgin Islands) set out a common sense approach to dealing with anticipated or estimated fees:  provided the debt collector clearly described each unearned fee or unpaid cost as “anticipated” or “estimated”, and included a statement alerting the consumer that anticipated or estimated items may not have to be paid, the communication would comply with the FDCPA.  Specifically, the debt collector would not be violating 15 U.S.C. 1692e(2), which prohibits “[t]he false representation of” either “the character, amount, or legal status of any debt” or “any services rendered or compensation which may lawfully be received by any debt collector for the collection of a debt,” or 15 U.S.C. 1692e(10), which prohibits “[t]he use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer….”  McLaughlin v. Phelan Hallinan & Shmieg, LLP, 756 F.3d 240 (3d Cir. 2014) (unearned fees and costs in collection letter not identified as estimated violated FDCPA), Kaymark v. Bank of America, N.A., 783 F.3d 168 (3d Cir. 2015) (extending the rationale in McLaughlin to cover statements contained in a legal pleading), Beard v. Ocwen Loan Servicing, LLC, 2015 WL 5707072 (U.S.D.C. M.D. Pa., September 24, 2015) (clearly identified anticipated fees and costs included in a reinstatement quote did not violate FDCPA), and Stuart v. Udren Law Offices, P.C., 25 F. Supp. 3d 504, 511 (M.D. Pa. 2014) (inclusion of clearly identified estimated attorneys’ fees and costs in payoff statement did not violate FDCPA).

The seemingly common sense approach adopted in the Third Circuit was not followed by the Eleventh Circuit, covering Alabama, Florida and Georgia.   In Prescott v. Seterus, Inc., 2015 WL 7769235 (11th Cir. December 3, 2015), the Court held that including anticipated fees in a reinstatement letter violated 15 U.S.C. §§ 1692e(2) and 1692f(1) despite the fact that Seterus clearly identified the fees as estimates, and refunded the unearned fees shortly after the reinstatement payment was made.  

The Court held Seterus violated both §§ 1692e(2)(B) and 1692f(1) by including the estimated attorney’s fees in the reinstatement letter.  1692f(1) provides that “[a] debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt,” including “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”  Because Prescott was not expressly obligated by the security agreement (the standard Fannie Mae/Freddie Mac form) to pay estimated attorney’s fees, Seterus violated 1692f(1).

And, by including estimated attorney’s fees in the reinstatement letter, Seterus also violated § 1692e(2)(B) because by demanding that Prescott pay the estimated fees before it would reinstate the loan it was seeking fees it could not “lawfully receive” under the terms of the security agreement. § 1692e(2) provides that “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt,” including “[t]he false representation of (A) the character, amount, or legal status of any debt; or (B) any services rendered or compensation which may be lawfully received by any debt collector for the collection of a debt.”

As a result of Prescott, some servicers have issued nationwide directives to their foreclosure law firms not to include estimated charges in reinstatement or payoff letters.  However, a one-size-fits-all approach is not best suited to state-by-state foreclosure practice.  Some states require that estimated charges are included in payment quotes.  North Carolina law requires a lender to respond to a borrower request for a payoff statement good for up to 30 days and to include information reasonably necessary to calculate the payoff amount to the good through date.  In South Carolina, judges often require payment quotes with 30-day good through dates and estimated charges.  Illinois law requires payoff statements to be valid for the lesser of 30 days or until the foreclosure sale date, and must include estimated charges.

Prescott and the servicer directives raise practical concerns:  given many borrowers tender payment on the eve of sale, or without advance notice, tenders will often be short because of additional charges incurred from the date the quote was provided.  Communicating the exact amount the borrower must pay will be problematic given the prohibition on providing estimated charges, and this may result in servicers having to decide whether to accept short payment or postpone sales to allow additional time to figure the correct amount due.  Law firms are concerned that they may not be paid for all fees earned and costs incurred after the payment quote is provided.  

Failure to Warn of Expected Increase in Debt Amount

Recently, the Second Circuit vacated the dismissal of a complaint alleging a violation of 15 U.S.C. § 1692e when a debt collector that notified consumers of their account balance failed to disclose that the balance may increase due to interest and costs.  Avila v. Riexinger, 15-1584(L) (2d Cir. March 22, 2016).  The second Circuit oversees Connecticut, New York and Vermont.

§ 1692e provides that a debt collector “may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.”  In Avila, because the collection notices stated the current balance but did not disclose the balance was continuing to accrue interest or that if debtors did not pay within a certain amount of time they would be charged a late fee, the Court found that the least sophisticated consumer could be misled into believing she could pay her debt in full by paying the amount in the notice even though if not paid until a later date there could be interest and fees added.

Avila followed the “safe harbor” approach from Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, & Clark, L.L.C., 214 F.3d 872 (7th Cir. 2000).  In Miller, involving the § 1692g(a)(1) “debt validation notice”, the notice stated only the unpaid principal balance and added that it did not include unpaid interest and fees.  The notice violated § 1692g(a)(1) because stating only the principal balance was not “the [full] amount of the debt”.  Judge Posner fashioned the following “safe harbor” statement to comply with the section:

As of the date of this letter, you owe $___ [the exact amount due].  Because of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay may be greater. Hence, if you pay the amount shown above, an adjustment may be necessary after we receive your check, in which event we will inform you before depositing the check for collection. For further information, write the undersigned or call 1–800– [phone number].

Avila at 10.  

Federal district courts in Virginia have taken a different approach.  In Kelley v. Nationstar, 2013 WL 5874704 (E.D. Va. October 31, 2013), the court considered the Miller “safe harbor” statement to be dicta (not part of the formal holding of the case) and concluded that stating the full amount of the debt as of a specific date, or as of the date of the letter, satisfied § 1692g(a)(1), noting the Fourth Circuit had not interpreted this section of the Act.  “Nationwide's (sic) FDCPA Letter reads: “Your total debt as of 10/15/12 is $202,197.63.”  If Nationstar had stopped with this sentence, it would have satisfied § 1692g(a)(1).”  Kelley, at *5.  Unfortunately for Nationstar, its debt validation letter also included an itemization of principal, interest, fees and expenses that did not add up to the statement of the total amount of the debt.  Denying Nationstar’s motion to dismiss, the court found that the notice was confusing to the “least sophisticated consumer” because it was susceptible to two alternative interpretations of the amount of debt owed on the account.  

Unhelpfully, the court also observed that Nationstar’s debt validation notice included the statement: “Because of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay may be greater”, but in its decision made no further reference to this language being either necessary or superfluous with respect to compliance with § 1692(a)(1).

The decision in Kelley found favor in Davis v. Segan, 2016 WL 254388 (E.D. Va. January 19, 2016).  “The court in Kelley acknowledged the difficulty in conveying an amount due on a future date “[b]ecause of the nature of loans with daily compounding interest charges, in order to state the correct amount of the debt, the debt collector must state it as of a specific day.”  Kelley, 2013 WL 5874704, at *5.  “[A] collection letter which states either the amount due as of the date of the letter or as of a specific date is in compliance with § 1692g.” Id. (citation omitted).”  Davis, at *3.

Conclusion

Given the different interpretations of the FDCPA by various federal courts, and state law governing the content of payment quotes, it may be inadvisable to adopt a single nationwide policy to deal with providing payoff and reinstatement quotes.  Servicers should look to the laws governing each state and federal circuit when issuing compliance directives.