The Court of Special Appeals of Maryland held that a foreclosure proceeding was subject to state law collection agency requirements, and therefore that a statutory trust that owned a consumer mortgage loan was required to hold a collection agency license prior to proceeding with foreclosure.
In McCray v. Federal Home Loan Mortgage Corp., the U.S. Court of Appeals for the Fourth Circuit determined that a borrower stated a claim under the Fair Debt Collection Practices Act, 15 U.S.C. §1692 et seq., (“FDCPA”) against a foreclosure law firm, noting that the definition of a “debt collector” does not require an “express demand for payment.” Rather, relying on its prior holding inWilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 374-76 (2006), the Court determined that Borrower sufficiently alleged that a law firm and substitute trustees were engaged in conduct regulated by the FDCPA, because their foreclosure activities were “in connection with” the collection of a debt or “an attempt” to collect a debt.
The Court also determined inapplicable the FDCPA’s exclusion from the definition of a “debt collector” for collection activities “incidental to a bona fide fiduciary obligation” noting that foreclosure is “central to,” not incidental, to the trustees’ obligation under the deed of trust.
A copy of the opinion can be found here.
Shortly after foreclosure proceedings commenced against her Maryland home, Borrower brought an action for damages under the FDCPA in federal court against the law firm (“Law Firm”), and attorneys within the firm who were appointed as substitute trustees under the deed of trust securing her mortgage loan (collectively “Substitute Trustees”). Borrower also sued the owner of the loan and her loan servicer, claiming, among other things, that they violated the federal Truth-in-Lending Act (“TILA), 15 U.S.C. § 1601, et seq. As to all defendants, Borrower alleged that defendants failed to provide her with certain notices and requested information purportedly required by these statutes. Regarding the owner of the loan, she claimed that it failed to provide her notice when it purchased the loan, as required under TILA, 15 U.S.C. § 1641(g). As to her loan servicer, she asserted that an assignment of her deed of trust also required it to afford her notice under TILA.
The district court dismissed the FDCPA claims against Law Firm and the Substitute Trustees, distinguishing their role in initiating foreclosure proceedings, from a role focused on collecting the debt. The district court noted that, even where a communication included a provision indicating that it was “an attempt to collect a debt,” it does not qualify as an attempt to collect a debt under Blagogee v. Equity Trustees, LLC, 2010 Wl 2933962 at *5-6, “unless there is an express demand for payment and other ‘specific information about the debt, including the amount of the debt, the creditor to the debt is owned, the procedure for validating the debt, and to whom the debt should be paid.” Id. Applying the Blagogee factors, the district court concluded that Borrower had failed to “allege any facts indicating that [Law Firm] or the [Substitute Trustees] were engaged in any attempt to collect a debt.” Op. at 7.
The district court also either dismissed or granted summary judgment as to Borrower’s remaining claims against the lender and loan servicer. Borrower thereafter appealed.
Reversing the dismissal of the FDCPA claims against the Law Firm and Substitute Trustees, the Fourth Circuit concluded that Borrower had adequately alleged that they were debt collectors, and that their actions constituted debt collection activity regulated by the FDCPA. Op. at 16.
Citing the definition of a “debt collector” under Section 1692a(6), the Court determined that such definition does not include any requirement that a debt collector be engaged in an activity by which it makes a “demand for payment.” Op. at 11. Rather, to be actionable, a debt collector need only have used a prohibited practice “in connection with” the collection of a debt or in an “attempt” to collect a debt.” Op. at 12 (citing Powell v. Palisades Acquisition XVI, LLC, 782 F. 3d 119, 123 (4th Cir. 2014)).
The Court found dispositive its prior holding in Wilson, in which it determined that a law firm that sent the borrower notice that it was preparing foreclosure papers, and who later initiated foreclosure proceedings, could be a debt collector under the meaning of the FDCPA because those foreclosure actions constitute attempts to collect a debt.
Thus, here, the Court concluded that “[i]t is clear from the complaint in this case that the whole reason that the [Law Firm] and its members were retained by [the creditor] was to attempt, through the process of foreclosure to collect on the $66,500 loan in default.” Op. at 14. The Court observed that documents furnished by the Law Firm and/or Substitute Trustees to Borrower indicated that they were pursuing foreclosure because she missed one or more payments; indicated that if she did not bring the loan current, such as by repayment, a foreclosure action may be filed in court; and provided Borrower with the nature of the default and the amount necessary to cure. “Thus, all of the defendants’ activities were taken in connection with the collection of a debt or an attempt to collect a debt.” Op. at 15 (Emphasis in original).
The Fourth Circuit also found inapplicable the fiduciary exclusion to the definition of debt collector under Section 1692a(6)(F)(i) for collections activities “incidental to a bona fide fiduciary obligation.” Op. at 15-16. The Court noted that foreclosure was “central” – not incidental – to the trustee’s obligation under the deed of trust.
As to the TILA claim regarding allegations of failure to provide notice of the transfer of ownership of the loan under 15 U.S.C. § 1641(g), the Court noted that Borrower failed to challenge the trial court’s determination that she was required to allege that the loan transferred after 2009, when the subject provision was enacted. Further, the Court also determined that, because Borrower conceded that she had notice of the transfer to the owner of the loan more than one-year prior to filing the lawsuit, the claim was barred by TILA’s one-year statute of limitations.
The Court also affirmed the district court’s dismissal of the TILA claim against her loan servicer, determining that allegations of assignment of the beneficial interest under a deed of trust (as opposed to legal title) did not implicate the statute. In addition to failing to challenge such ruling, the Court observed that her allegations were inconsistent with her claims against the loan owner.
Consequently, the Court reversed only the dismissal of the FDCPA claims against the Law Firm and Substitute Trustees and remanded the case for further proceedings, expressly stating that its conclusion “is not to be construed to indicate, one way or the other, whether they, as debt collectors, violated the FDCPA.” Op. at 20.
The Court of Appeals of Maryland recently determined that a law firm engaged in the business of assisting homeowners to modify their mortgage loans constituted a “credit services business” under the Maryland Credit Services Business Act, Md. Code, Comm. Law (“CL”) § 14-1901 et seq. (“MCSBA”), and was subject to regulation and licensure. The Court also determined that, because the law firm had engaged in the credit services business on a “regular and continuing basis,” it was not subject to the Act’s exemption for attorneys.
A copy of this opinion is available here.
Several homeowners facing foreclosure hired a Virginia law firm, which promised to help renegotiate their mortgage loans in exchange for payment. After receiving a complaint from one such homeowner, the Maryland Commissioner of Financial Regulation (“Commissioner”) instituted administrative proceedings against Law Firm and its managing partner (collectively, “Law Firm”). Following an evidentiary hearing, Commissioner found that Law Firm committed multiple violations of the MCSBA, which regulates “credit service businesses” purporting to assist consumers in obtaining credit. Specifically, neither Law Firm nor any of its attorneys held a license under the MCSBA. The Commissioner also found that Law Firm violated the MCSBA’s bonding and disclosure requirements. After settlement efforts failed, the Commissioner entered a cease and desist order prohibiting law firm from engaging in any credit services business activities with Maryland residents, imposed a civil monetary penalty of $114,000 and, determining that its violations were willful, directed law firm and its principal to pay 57 Maryland consumers treble damages totaling $720,600.
Reversing the Commissioner’s order, both the trial court and the intermediate appellate court held that that Law Firm was not a “credit services business” under the MCSBA because its attempts to obtain loan modifications for its clients were “ancillary” to its provision of legal services. The Commissioner thereafter obtained certiorari in the Court of Appeals.
The Court of Appeals agreed with the Commissioner that Law Firm constituted a “credit services business,” which is defined to include “any person [or entity] who, with respect to the extension of credit by others, sells, provides, or performs, or represents that such person can or will sell, provide or perform” any of certain enumerated services “in return for the payment of money or other valuable consideration.” Md. Code, CL § 14-1901(e)(1). Such services include “obtaining an extension of credit for a consumer,” or providing advice or assistance to a consumer in connection with obtaining an extension of credit.
Notably, the Court determined that, in undertaking to renegotiate the terms of homeowners’ mortgage loans in exchange for payment, Law Firm was offering to assist the homeowners in “obtaining an extension of credit,” thus falling within the MCSBA’s definition of a “credit services business.” Op. at 15-16. The Court also examined the MCSBA’s legislative history and concluded that the statute was not limited to regulating only “ordinary credit repair services” or payday lenders. Op. at 18. “Rather, it is intended to provide broad protection to consumers of credit services.” Op. at 18. Moreover, the Act’s exemption for “mortgage assistance relief providers” who were separately regulated confirmed that “the General Assembly believed that those who offer to obtain loan modifications for homeowners would be otherwise covered by the MCSBA.” Op. at 19.
The Court then evaluated whether Law Firm met its burden to show that its activities were exempt from regulation under a statutory provision exempting attorneys. See Md. Code, CL § 14-1901(e)(3)(vi). For the “attorney exemption” to apply, three requirements must be met: “(1) the individual must be admitted to the Bar of the Court of Appeals of Maryland, (2) the individual must render the services within the course and scope of practice by the individual as a lawyer, and (3) the individual must not engage in the credit services business ‘on a regular and continuing basis.’” Op. at 22. The Court determined that Law Firm could not satisfy the third prong because, over the relevant time period, Law Firm entered into 57 agreements with Maryland homeowners, and consulted with hundreds of others. Further, such agreements constituted a “very significant part of the firm’s business” and “accounted for most of the work of its Maryland-licensed attorney . . . .” Op. at 23.
The Court noted that “[a] Maryland attorney who counsels an individual client facing foreclosure and attempts to negotiate a mortgage loan modification would . . . ordinarily be exempt from the MCSBA.” Op. at 23. However, “there may be cases where there is a significant question at what point an attorney who frequently provides such services has crossed the line into providing ‘regular and continuing’ credit services. That, however, is not this case.” Op. at 23. To that end, the Court observed that “[t]he consultations and agreements with Maryland homeowners seeking loan modifications were not only a very significant part of the firm’s business during the month’s in question, but also accounted for most of the work of its Maryland-licensed attorney by the time he left the firm.” Op. at 23. Consequently, the Court determined that there was substantial evidence to support the Commissioner’s finding that the law firm engaged in a credit services business on a regular basis. Op. at 23.
Accordingly, the Court held that Law Firm was subject to the MCSBA as a “credit services business,” but remanded the case to the trial court to determine whether Law Firm’s violations were willful. Op. at 28.