10th Circuit: Law Firm Not Required To Flag Erroneous Credit Reports in Foreclosure Proceeding

A law firm hired to foreclose on a property was not required under the Fair Debt Collection Practices Act (FDCPA) to inform a credit reporting agency of erroneously negative credit reports on the borrower, even if the firm was aware of the mistake, the U.S. Court of Appeals for the 10th Circuit held in a recent ruling.

In Llewellyn v. Allstate Home Loans, et al., the borrower, when refinancing his loan, failed to inform the closing agent that the servicing rights to the loan had been transferred. Accordingly, the closing agent wired payoff funds to the original servicer, and the borrower stopped making payments. 

When the second servicer did not receive the borrower's monthly payments, it made negative credit reports to a credit reporting agency and hired a law firm to initiate foreclosure proceedings. Eventually, the law firm and second servicer determined what had occurred, and the original servicer forwarded the payoff funds to the second servicer. The second servicer and the law firm, however, did not take any action to remove the negative credit reports for several more months.

The borrower subsequently filed an action containing various allegations, including that the second servicer and law firm violated the FDCPA by failing to reverse the credit reports despite the second servicer's acknowledgment that the reports were made in error. The borrower also alleged that the second servicer willfully violated the Fair Credit Reporting Act (FCRA).

The 10th Circuit partially reversed the district court's grant of summary judgment in favor of the second servicer on the borrower's FCRA claims but affirmed its grant of summary judgment in favor of the second servicer and the law firm on the FDCPA claims. Most significantly, the court held that the law firm's failure to notify the credit reporting agency that the debt was disputed or take steps to reverse the negative credit reports did not constitute an FDCPA violation. Although the law firm was aware that the negative credit reports had been made in error, it had never reported the debt to a credit reporting agency, the court found. Concurring with the Eighth Circuit's 2008 opinion in Wilhelm v. Credico, Inc., the court concluded that the firm was neither obligated to inform the agency of the dispute nor under any affirmative duty to reverse the negative reports.

The court also dispensed with the borrower's FDCPA claims against the second servicer. It held that, because the borrower's loan was not in default at the time it was obtained by the second servicer, the second servicer was not a "debt collector" within the meaning of the FDCPA.

On the FCRA claims, the second servicer argued that the borrower did not provide sufficient evidence of damages to survive summary judgment. The 10th Circuit disagreed, holding that although the borrower failed to provide sufficient evidence to support his claims of economic damages, his own affidavit regarding his deteriorated health and depression was sufficient to create a genuine dispute as to whether the servicer's actions caused him emotional damages. The court further held that summary judgment was not appropriate on whether an FCRA violation had occurred. The 10th Circuit found there was a "genuine dispute of fact" as to whether the servicer's reporting of the borrower's non-payment without also reporting the underlying dispute created a "materially misleading impression" in violation of FCRA.

The 10th Circuit did agree with the district court's grant of summary judgment in favor of the second servicer on the plaintiff's claim that the servicer's alleged FCRA violation was "willful." According to the 10th Circuit, the servicer's delay in removing the negative credit reports did not rise to the level of an "intentional violation" or a violation in "reckless disregard of its [FCRA] duties" as required for recovery of statutory or punitive damages by the FCRA's willful violation provision.

- Anthony C. Kaye 


Rich Andreano Joins American College of Consumer Financial Services Lawyers

The American College of Consumer Financial Services Lawyers is an elite group of attorneys who are leaders as both practitioners and scholars of consumer financial services law. I'm pleased to announce that our own Rich Andreano has joined its ranks as a Fellow.

Rich is the sixth Ballard Spahr attorney to be admitted to the College, giving the firm one of the highest memberships in the country. I had the privilege of serving as the organization's President when it was founded in 1996 and remain active as a Fellow; the other Ballard Spahr Fellows are John Culhane, Jeremy Rosenblum, and Barbara Mishkin.

The College recognizes attorneys who are particularly skilled and experienced in handling consumer financial services matters and are dedicated to improving and enhancing the practice of consumer financial services law and the profession. Membership is by invitation only.

Rich's work for Ballard Spahr includes advising a vast range of settlement providers on regulatory compliance and transaction matters, as well as helping clients with preparing for and handling Consumer Financial Protection Bureau exams. But he also has distinguished himself by promoting learning and scholarship in this area of law. He has spoken extensively on regulatory issues affecting the mortgage banking industry.

Rich brings a wealth of knowledge and experience to the College, and the organization will be greatly enriched by his contributions. Please join me in congratulating him on this achievement.

- Alan S. Kaplinsky


Ninth Circuit Rejects Class Action Settlement Providing Conditional Incentive Awards

The U.S. Court of Appeals for the Ninth Circuit has reversed approval of a $45 million class action settlement that had been reached with three credit reporting agencies in Radcliffe v. Experian Information Solutions Inc. The court held that the settlement, by conditioning the payments of "incentive awards" to the class representatives on their support for the settlement, created a conflict of interest between the class representatives and absent class members. This rendered the class representatives and class counsel inadequate and the settlement unacceptable, the court ruled.

The Ninth Circuit's decision is the latest in a line of recent rulings overturning class action settlements on conflict of interest and other grounds. Courts and class member objectors are subjecting such settlements to greater scrutiny. This means parties and their attorneys who enter into such agreements must be careful to ensure that the terms will appear fair, reasonable, and adequate upon review.

Radcliffe consolidated multiple lawsuits filed against Experian Information Solutions, Inc., TransUnion LLC, and Equifax Information Services LLC. The plaintiffs are all consumers who have been through bankruptcy. They allege that the credit reporting agencies violated the Fair Credit Reporting Act and its California state law counterpart by failing to remove from plaintiffs' credit reports certain debts that were discharged in bankruptcy. 

Ultimately, the parties reached a settlement providing for injunctive and monetary relief. The monetary settlement created a common fund of $45 million. Class representatives would receive "incentive awards" of up to $5,000 each, but only if they supported the settlement. This was significantly higher than what other class members would receive. Class members who had sustained actual damages were to receive awards of between $150 and $750, depending on the nature of their injuries. The remaining class members were to be paid roughly $26 each. 

On appeal, the Ninth Circuit focused on "whether class representatives and class counsel are adequate where the settlement agreement conditions payment of incentive awards on the class representatives' support for the settlement." Looking at its prior decisions, the court acknowledged that "[a]lthough we have approved incentive awards for class representatives in some cases, we have told district courts to scrutinize carefully the awards so that they do not undermine the adequacy of the class representatives." The danger of incentive awards, the court explained, was that they could encourage class representatives "to accept suboptimal settlements at the expense of the class members whose interests they are appointed to guard." 

Examining the incentive awards in Radcliffe, the court identified two problematic features putting the class representatives in conflict with the absent class members. The court noted principally that the "settlement agreement explicitly conditions the incentive awards on the class representatives' support for the settlement." The awards, the court explained, "changed the motivations for the class representatives. Instead of being solely concerned about the adequacy of the settlement for the absent class members, the class representatives now had a $5,000 incentive to support the settlement regardless of its fairness and a promise of no reward if they opposed the settlement." 

The court also noted the "significant disparity" between the incentive awards and the payments to be received by absent class members. It questioned "whether class representatives could be expected to fairly evaluate whether awards ranging from $26 to $750 is a fair settlement value when they would receive $5,000 incentive awards." The court concluded that, "as a result of the conditional incentive payments," the class representatives had "divergent interests" from those of absent class members and were unable to "fairly and adequately protect the interests of the class." 

The court also concluded that the conditional incentive awards rendered class counsel inadequate. The court reasoned that class counsel "has a fiduciary duty to the class as a whole," and that counsel had a duty to alert the district court to the presence of a conflict "[a]s soon as the conditional-incentive-awards provision divorced the interests of the class representatives from those of the absent class members," which counsel failed to do. The court stated that class counsel's "[c]onflicted representation" was another "independent ground for reversing the settlement … ." 

Burt M. Rublin

Arkansas Revises Licensing Exemption

Arkansas recently revised certain exemptions from the Fair Mortgage Lending Act. Previously, a subsidiary of a state or federally chartered bank, savings bank, savings and loan association, or credit union was exempt from the Act. Under the new revisions, however, only subsidiaries of state-chartered banks regulated by the Arkansas Bank Department will be exempt. This revision is effective July 18, 2013. Entities that were previously, but are no longer, exempt must submit the appropriate license application by this date to be in compliance with the Act.

Three More Agencies Adopt the Uniform State Test

Three more state agencies have announced that they will be adopting the new national MLO test with the Uniform State Content. The Wyoming Division of Banking, Indiana Secretary of State, and Montana Division of Banking and Financial Institutions will adopt the test effective July 1, 2013. With these announcements, a total of 30 state agencies have adopted the new test and will no longer require a separate state-specific test component as a prerequisite for MLO licensure.

Washington Amends Scope of Mortgage Broker Licensing Requirement

The state of Washington has recently amended its mortgage broker licensing statute. Under the new amendment, anyone who performs or holds themselves out as being able to provide residential mortgage loan modification services must obtain a Mortgage Broker License. This amendment is effective July 29, 2013.

Oklahoma Adds a Mortgage Lender License

Oklahoma recently amended its Secure and Fair Enforcement for Mortgage Licensing Act to add a Mortgage Lender License. A mortgage lender is defined as any entity that takes an application for a residential mortgage loan, makes a residential mortgage loan, or services a residential mortgage loan and is an approved or authorized U.S. Department of Housing and Urban Development mortgagee with direct endorsement underwriting authority, Fannie Mae or Freddie Mac seller or servicer, or Ginnie Mae issuer.

It is unclear whether an entity that does not have such approval or authorization but otherwise meets the definition of a mortgage lender is eligible for the new license. A licensed mortgage lender that also engages in activities falling under the definition of a mortgage broker is not required to obtain a separate Mortgage Broker License. We have been advised by the Oklahoma Department of Consumer Credit that further guidance on the parameters and implementation of the new license will be forthcoming, and we will provide an update when such guidance is issued. This amendment is effective November 1, 2013.

- Matthew Saunig

Copyright © 2013 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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