News & Resources

Appeals court adjusts debt collector definition under FDCPA

Feb 18, 2013 Philip Burgess

Appeals court adjusts debt collector definition under FDCPA

Federal and state lawmakers continue to set new regulatory compliance and best practices guidelines pertaining to debt collection, as agencies in this industry have become highly active in the years following the Great Recession. Firms that carry out the collections process and accounts receivable management (ARM) responsibilities should take the time to look over policies and ensure the protocols are in line with new legislation.

Because of the abusive practices of a few, the industry as a whole has had to combat a greater stigma and deal with more stringent laws and enforcement than ever before. However, companies that are not completely comfortable with ARM should consider outsourcing the responsibilities to a firm that specializes in the associated activities, as this will ensure legal, timely and efficient turnaround on all debt collections.

New precedent set 

The U.S. Court of Appeals for the Sixth Circuit recently came to a decision regarding a case between plaintiff Lawrence Grazer and a defending financial institution that had been in motion since March 2012. The case involved the purchase of a home in Ohio that became extremely complex when the purchaser, Charles Klie, passed away shortly after Coldwell Banker, the lender, transferred servicing rights to a major financial services institution.

After Klie passed away, the loan went into default roughly four months later and attorneys filed for foreclosure. Later, Glazer sued the defendant and its attorneys for allegedly concealing Fannie Mae's actual ownership of the loan saying that the promissory note, which the defendant claimed to possess, was in fact possessed by a custodian for Fannie Mae. The property was passed to Glazer as a beneficiary in Klie's will, while he then disputed the debt and requested verification, which the defendant's lawyers refused to provide.

Glazer believed that the defendant and its lawyers had violated several statutes under the Fair Debt Collection Practices Act (FDCPA), while only apply to debt collectors. The court's report indicated that one of the exemptions, though, under the FDCPA is that "a person attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity concerns a debt which was not in default at the time it was obtained by such person" is not considered a debt collector.

This statute is especially important for this case and others like it, as thus far  foreclosures had not been viewed as debt collections. With respect to this case, the Appeals Court explained that the defendant had become the custodian of the loan prior to default, exempting the bank from the FDCPA. While Glazer ended up losing the case, the court explained that there must be more guidance in the FDCPA that defines what a debt collector is, as the current assessment does not carry enough meaning.

Additionally, the Appellate Judges decided that mortgage foreclosures should be considered debt collections under the FDCPA in the future, and that various other Circuit Courts had come to similar decisions in recent years. This rule applies to not only debt collection professionals who are seeking to obtain repayment for mortgage foreclosures, but also any lawyers involved in the activity.

Refining practices for maximum security
Debt collection agencies, as well as any business, that does not adhere to the laws governing collection practices could be at risk of a variety of devastating penalties, such as incurring financial losses, fines and sanctions.

As mortgage foreclosure debt collections have become more common in recent years, especially following the housing crisis, all agencies partaking in related activities should ensure they follow new guidance, including the decision listed above by the U.S. Court of Appeals for the Sixth Circuit.