A federal appeals court has ruled that a nonbank mortgage servicer’s notice of servicing rights transfer sent pursuant to RESPA constitutes debt collection and thus triggers mandatory FDCPA disclosures.
The Second Circuit Court of Appeals’ ruling this month in Hart v. FCI Lender Services has important ramifications for nonbank servicers that acquire distressed loans. A delinquent borrower filed the putative class action against his mortgage servicer for failing to disclose to the current creditor under FDCPA § 1692g in the initial notice of transfer of servicing rights or within five days after. Citing similar precedent from the Seventh Circuit, the servicer argued that the disclosure obligations under 1692g of the FDCPA are only triggered upon providing the “initial communication…in connection with the collection of any debt” and that the transfer of servicing notice under Section 6 of RESPA is not a debt collection communication.
The Second Circuit, however, held that the notice was not only a communication in connection with debt collection, but was actual debt collection. The Court explained that whether a particular communication is made in connection with collection of a debt is a “question of fact” and “determined by reference to an objective standard.” The Court then made clear that if the borrower could “reasonably understand it” to be a communication in connection with the collection of a debt, then it is a debt collection communication under the FDCPA regardless of the sender’s “subjective intent.” The Court also declined to adopt the Third Circuit’s test that the communication must, at a minimum, be intended to “induce payment” in order to be a communication in connection with debt collection.
The Court went even further and held that the transfer notice was actual debt collection because it contained the standard FDCPA disclaimer that, among other things, the notice “was an attempt to collect the debt” and that the borrower had 30 days to dispute the debt. The Court reasoned that a “reasonable consumer” would credit these statements as an attempt to collect a debt, and thus disclosure obligations under § 1692g must be made in that communication or within five days after.
The Hart decision clearly has significant consequences for nonbank servicers that acquire pools of distressed loans. Servicers face both individual and class action exposure if their RESPA transfer servicing notices contain boilerplate FDCPA disclaimers but fail to set forth each of the disclosures required by § 1692g of the FDCPA. Servicers should immediately review their servicing transfer policies and procedures to ensure that these FDCPA disclosures are provided as part of the initial transfer notice or within five days after.
