Mortgage Lenders, Servicers Fall Under California’s Rosenthal Act

by Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

California’s Rosenthal Fair Debt Collection Practices Act encompasses mortgage lenders and servicers, a state appellate panel ruled, weighing in on an issue that has split the federal district courts in the state. Servicers need to be mindful that the Rosenthal Act is broader than the federal Fair Debt Collection Practices Act (FDCPA), a trend reflected in this and other opinions. Servicers collecting only on debt they acquired while it was current are generally exempt from the FDCPA but are subject to many of the same prohibitions, and are required to send validation notices by virtue of the Rosenthal Act.

What happened

The plaintiff alleged that his mortgage servicer, Seterus, made inconveniently timed phone calls and threatened legal action prior to the expiration of the grace period associated with his deed of trust (California generally uses this format in lieu of mortgages).

His 2016 lawsuit stated claims for violations of the Rosenthal Act and the state’s unfair competition law (UCL).

The defendants, Seterus and its parent company, IBM, demurred (the California state court equivalent of filing a motion to dismiss), arguing that neither of them was a “debt collector” who engages in “debt collection” pursuant to the Rosenthal Act. A trial court sustained the demurrer, the plaintiff appealed and the appellate panel reversed, relying on the general rule that “civil statutes for the protection of the public are, generally, broadly construed in favor of that protective purpose.”

“It is clear that the Rosenthal Act is a civil statute that was enacted for the protection of the public, and in interpreting it, we are mindful of the fact that, to the extent that the statutory language is ambiguous, the statute should be construed broadly in favor of protecting the public,” the court wrote. “Given this principle, and the fact that the Rosenthal Act’s definitional language is sufficiently broad to include mortgage lenders and/or mortgage servicers within its purview, we conclude that mortgage lenders and mortgage servicers can be ‘debt collectors’ under the Rosenthal Act.”

The Rosenthal Act was enacted to prohibit debt collectors from engaging in unfair or deceptive acts or practices in the collection of consumer debts, the court explained, and was passed the same year as its federal counterpart, the FDCPA.

As defined by the California statute, a debt collector is “any person who, in the ordinary course of business, regularly, on behalf of himself or herself or others, engaged in debt collection.” The term “debt collection” is defined as “any act or practice in connection with the collection of consumer debt,” while “consumer debt” and “consumer credit” mean “money, property or their equivalent, due or owing or alleged to be due or owing from a natural person by reason of a consumer credit transaction.”

The act is silent with respect to whether it applies to persons or entities attempting to collect mortgage debt, and the definitions make no reference to mortgage lenders and/or servicers, the appellate panel noted. But given that the Rosenthal Act is a remedial statute that should be interpreted broadly in order to effectuate its purpose, the court relied on the “ordinary and usual meaning” of the act’s language to conclude that the “obtaining of a mortgage involves a transaction in which a natural person acquires property by way of borrowing the funds used to obtain the property from another person or entity without full immediate payment and with the promise to pay back those funds.”

Interpreting the statute this way “furthers the purpose of the legislation,” the court said. Further, “the conduct that Davidson alleges that the defendants engaged in—i.e., the harassing telephone calls at all hours of the day, and the threats of negative credit reporting and threats to foreclose—is precisely the type of conduct that the Legislature wanted to protect consumers against when it enacted the Rosenthal Act.”

Objecting to the court’s reading of the statute, the defendants argued that mortgage debt is not debt “obtained primarily for personal, family or household purposes.” The court responded that the defendants were advocating for a skewed focus on the statute’s definitions. Instead of whether or not a given transaction involves personal property or real property, the key question is whether the transaction was engaged in by a natural person for personal purposes as opposed to by a corporation or natural person for business purposes. As a large number, if not the vast majority, of mortgages are obtained for the purpose of purchasing a personal or family residence, this fell within the literal terms of the Rosenthal Act, the court found.

The court also rejected the defendants’ position that a real estate transaction could not be considered a “consumer” transaction because of the “relative complexity” and “mountain of paperwork.” The “Legislature provided a specific definition of a ‘consumer credit transaction,’ and that definition is sufficiently broad to include transactions that involve real property; there is no indication in the text of the provision that it is intended to exclude transactions that involve real property or the use of real property as security for the debt, nor is there any indication that the statute excludes transactions that are complex or involve ‘a mountain of paperwork,’” the panel wrote.

As for prior case law, the federal courts have split on the application of the Rosenthal Act to mortgage lenders and servicers, the appellate panel said. Many of the authorities cited by the defendants addressed a slightly different issue (whether or not foreclosing on a deed of trust constitutes “debt collection” under the statute) or have relied on the fact that the lenders and servicers would not be “debt collectors” under the FDCPA.

“This reasoning is problematic, however, because the FDCPA statutory definition of ‘debt collector’ differs significantly from the definition of ‘debt collector’ provided under the Rosenthal Act,” the court said. “The Rosenthal Act does not mirror the FDCPA, and clearly does not do so with respect to the definition of ‘debt collector.’”

The court found it clear that the California legislature intended the statute provide a broader definition of “debt collector” than that found in the federal statute. “In our view, those federal courts that have concluded that [the] definition of ‘debt collector’ may include mortgage lenders and mortgage servicers have the better position under an analysis of the actual statutory language.”

“We therefore conclude that the Rosenthal Act’s definition of ‘debt collector’ applies to a mortgage servicer who engages in debt collection practices in attempting to obtain repayment of mortgage debt, and that the trial court improperly sustained the defendants’ demurrer on the ground that the Act does not apply to mortgage servicers,” the panel wrote.

Given the reversal of the Rosenthal Act claim, Davidson’s UCL claim (which was premised on the Rosenthal Act claim) was also reversed.

To read the opinion in Davidson v. Seterus, Inc., click here.

Why it matters

Emphasizing the remedial nature of the Rosenthal Act, the California appellate panel concluded that its broader definition of “debt collector” distinguished it from its federal counterpart and encompassed both mortgage lenders and servicers. The opinion could have a significant impact on mortgage lenders and servicers in the state, although given the conflicting case law and the high stakes, the defendant will likely appeal the case to the California Supreme Court.

Servicers need to be aware that the Rosenthal Act does not exempt entities solely on the basis that they acquired the debt when it was current. The Rosenthal Act also requires servicers to send validation notices unless collecting on debt the servicer or its affiliate originated. This is a narrower exemption than that provided by the FDCPA, which generally excludes from its coverage entities collecting on debt they acquired while current.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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