Alabama Federal Court Ruling May Enable Borrowers with Tenants To Challenge Foreclosures

A recent decision from the U.S. District Court for the Northern District of Alabama may provide borrowers who rent portions of their property to tenants with an avenue for challenging a foreclosure. The court's analysis suggests that borrowers alleging invalid mortgage assignments could raise claims of wrongful interference with the business relationship between the borrower and tenant, and such claims could withstand a motion to dismiss.

In ECP Financial II LLC v. Ivey, an assignee of a commercial mortgage loan filed claims against the loan guarantor for amounts due under the loan. The guarantor, in turn, filed counterclaims for wrongful interference with business relations, wrongful foreclosure, and breach of contract. The guarantor alleged that the assignee lender had sent representatives to the premises and advised the tenants to begin making payments to a person or entity other than the borrower. In addition, the assignee published foreclosure notices and notified the debtor that it intended to foreclose, according to the counterclaims.

The plaintiff moved to dismiss the counterclaims. The district court dismissed the wrongful foreclosure counterclaim because no foreclosure sale had occurred. But the court denied the motion to dismiss the counterclaims for wrongful interference with business relations and breach of contract.

The court noted that the counterclaims alleged, among other things, that the loans were not properly assigned to the plaintiff and therefore the plaintiff had no right to publish foreclosure notices.  According to the counterclaims, this amounted to improper interference with the existing business relationship between the borrower and its tenants. While the court noted that it might be "unlikely" that the guarantor could ultimately prove that the assignment was invalid, the court found that the guarantor pleaded sufficient facts to survive the motion to dismiss.

While the decision in ECP concerned a nonresidential loan, it provides a potential avenue for residential mortgage loan borrowers with tenants to delay foreclosure. If a borrower alleges that an assignment of the mortgage to a subsequent servicer is invalid, under ECP, the borrower could assert a claim for wrongful interference with the business relationship between the borrower and his tenant. Courts applying the reasoning in ECP could hold that such a claim was sufficient to survive a motion to dismiss, thereby potentially increasing litigation and other related costs for lenders and servicers.

- Robert A. Scott and Sarah T. Reise


Eleventh Circuit Considers Permissibility under FDCPA of Percentage-Based Debt Collection Fees 

In a recent per curiam decision, the U.S. Court of Appeals for the Eleventh Circuit suggested that percentage-based debt collection fees are permissible under the Fair Debt Collection Practices Act (FDCPA) if they are supported by the language of the consumer agreement underlying the debt at issue. The decision underscores the need for debt collectors and debt buyers to review such agreements carefully to determine whether the collection fees they seek to charge are consistent with the agreements' terms.

In Bradley v. Franklin Collection Service, Inc., a debt collection agency sought to collect a medical bill that included a collection fee equal to 33 1/3 percent of the account balance. In his putative class action complaint, the consumer alleged that the fee violated the FDCPA provision prohibiting the collection of any amounts that are not "expressly authorized by the agreement creating the debt or permitted by law." The fee had been added to the consumer's account by the medical provider in accordance with its agreement with the collection agency.

The Eleventh Circuit, reversing the district court, held that the fee violated the FDCPA because "there was no express agreement between [the provider and the consumer] allowing for collection of the 33-and-1/3% fee." In the patient agreement, the consumer had only agreed to pay the medical provider's "costs of collection," and no evidence was presented that the collection fee charged bore "any correlation to the actual cost of [the agency's] collection effort." (emphasis supplied). (The Eleventh Circuit followed the Eighth Circuit's 2000 ruling in Kojetin v. CU Recovery, Inc., which also found that a percentage-based collection fee violated the FDCPA because the consumer had only agreed to pay actual collection costs.)

Most significantly, the Eleventh Circuit observed that its holding "is not to say that [the consumer and the medical provider] could not have formed an agreement allowing for the collection of the percentage-based fee. It is the nature of the agreement between [the consumer and the medical provider], not simply the amount of the fee that is important here." The court contrasted the consumer's patient agreement with that of another named plaintiff who had agreed to pay "all costs of collection including…reasonable collection agency fees."

The court also observed that based on such language, the other named plaintiff had declined to argue on appeal that his patient agreement did not cover the 30 percent collection fee he was charged. In addition, it noted that "[c]ourts examining other contractual language have also suggested that a percentage-based fee can be appropriate if the contracting parties agreed to it."

The decision clearly implies that even if unrelated to actual collection costs, a percentage-based collection fee will not violate the FDCPA if it is supported by the language of the underlying consumer agreement. Accordingly, debt collectors and debt buyers seeking to charge percentage-based collection fees should make sure that such agreements contain contractual language allowing such fees and any other fees sought to be charged.

In addition, debt collectors and debt buyers seeking to charge percentage-based collection fees should confirm that such fees are permissible under applicable state law. Many states do not allow such fees, and even if the fees are supported by the contractual language, a debt collector or debt buyer would violate the FDCPA and state law by seeking to charge percentage-based fees in such states.

- Barbara S. Mishkin

Welcome to James Duchesne

We are pleased to welcome James N. Duchesne as the newest member of our Mortgage Banking Group. James is an associate in the firm's Washington, D.C., office who counsels clients on compliance with privacy and data security issues and consumer financial services laws.

As a clerk during law school, James assisted clients with complying with the Telephone Consumer Protection Act, the Telephone Sales Rules, and the CAN-SPAM Act. He also performed privacy assessments of new products and advertising campaigns and contributed to several data breach response efforts. In addition, he is a Certified Information Privacy Professional (CIPP/US).

James holds a J.D. from The Catholic University of America, Columbus School of Law, as well as a certificate from the school's Institute for Communications Law Studies, graduating cum laude, and a B.A. from Union College.


NMLS Adds New Licenses from Delaware and Oregon

Two new states are now receiving licensing applications through NMLS. The Delaware Office of the State Bank Commissioner has begun receiving new applications and transitional filings for the Lender License, Broker License, License Lender, and Broker Branch License through the NMLS. The Oregon Division of Finance and Corporate Securities is also now taking new application and transitional filings for the Consumer Finance License and the Consumer Finance Branch License through the NMLS.

Four New States Ring in the New Year Using the National SAFE MLO Test

As we have previously reported here and here, four new states began using the National SAFE MLO test on January 1, 2014. The four state and territory agencies that have adopted the test as of this year are:

  • The Nevada Department of Business & Industry
  • The New Mexico Financial Institutions Division
  • The Puerto Rico Office of the Commissioner of Financial Institutions
  • The U.S. Virgin Islands Division of Banking & Insurance

These additions bring the ever-expanding number of agencies that have adopted the National SAFE MLO test to 39. Since the test was first made available on April 1, 2013, more than 30,650 MLOs have enrolled for the SAFE MLO test, and 21,100 MLOs have enrolled for the stand-alone Uniform State Test (UST). See our prior legal alert for a discussion on the impact of state adoption of the National test and the UST on MLOs.

- Marc D. Patterson

Copyright © 2014 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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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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