Mortgage Servicers Proceed With Caution: Warning About Communications In Close Proximity To Demands

Mortgage servicers should take note of a recent decision issued by an Illinois District Court.  In ruling on a motion to dismiss filed by a mortgage servicer, the Northern District of Illinois held that a transfer letter notifying a borrower that his loan payments would be collected by a new entity was a communication in connection with the collection of a debt because it was sent in close proximity to a demand letter.

In Synder v. Ocwen Loan Servicing, LLC, No. 14 C 8461 (N.D. Ill. Apr. 27, 2015), Keith Snyder ("Snyder") received two letters from Ocwen Loan Servicing ("Ocwen") dated July 11, 2014 relating to a delinquent debt.  The first letter, titled "Notice of Servicing Transfer," informed Snyder that Ocwen would collect payments on his loan going forward and provided an address to which payments should be sent.  The second letter stated that Ocwen was the servicer of the loan, listed the amount of debt, advised how Snyder would go about paying off the loan, and said that unless he disputed the validity of the debt within 30 days, the servicer would assume the debt was valid.

Snyder alleged that the letters violated the FDCPA because the interest sought by the servicer had been improperly charged and the servicer falsely represented the legal status of his loan by failing to inform him that his debt was not legally owed because the statute of limitations on collection of the debt had run.

For the Federal Debt Collection Practices Act to apply, two threshold criteria must be met.  First, the defendant must qualify as a debt collector.  Second, the communications by the debt collector that form the basis of the suit must have been made in connection with the collection of a debt.  There is no bright-line rule for determining whether a communication from a debt collector is made in connection with the collection of a debt.  The debt collector need not demand payment of the debt; a demand is just one of several factors that come into play in the inquiry. Other factors include whether payments were past due; whether the purpose of the communication was to induce the debtor to settle the debt; and the relationship between the parties.

Ocwen did not dispute that that the validation letter was sent in connection with the collection of Snyder's debt.  However, Ocwen did dispute that the transfer letter was sent in connection with collection of Snyder's debt.  The Illinois District Court found that while in isolation, the transfer letter did not appear to be connected to debt collection; the context of communications is an important factor to consider.  As a result, the court found that the allegation that the validation letter and the transfer letter were sent on the same day was sufficient to support an inference that the transfer letter was sent in connection with the collection of Synder's debt.

Based on this ruling, mortgage servicers should take note that any communications with borrowers in close proximity to demand letters may be viewed as communications in connection with the collection of a debt and should make efforts to ensure that these communications comply with the FDCPA.

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