C. Kaye, Ethan
Chernin, and Kristen
A law firm hired to foreclose on a property was not
required under the Fair Debt Collection Practices Act (FDCPA) to inform a
credit reporting agency of erroneously negative credit reports on the borrower,
even if the firm was aware of the mistake, the U.S. Court of Appeals for the 10th
Circuit held in a recent ruling.
In Llewellyn v. Allstate Home Loans, et al. [an enhanced version of this opinion is available to lexis.com
subscribers], the borrower, when refinancing his loan,
failed to inform the closing agent that the servicing rights to the loan had
been transferred. Accordingly, the closing agent wired payoff funds to the
original servicer, and the borrower stopped making payments.
When the second servicer did not receive the borrower's
monthly payments, it made negative credit reports to a credit reporting agency
and hired a law firm to initiate foreclosure proceedings. Eventually, the law
firm and second servicer determined what had occurred, and the original
servicer forwarded the payoff funds to the second servicer. The second servicer
and the law firm, however, did not take any action to remove the negative
credit reports for several more months.
The borrower subsequently filed an action containing
various allegations, including that the second servicer and law firm violated
the FDCPA by failing to reverse the credit reports despite the second
servicer's acknowledgment that the reports were made in error. The borrower
also alleged that the second servicer willfully violated the Fair Credit
Reporting Act (FCRA).
The 10th Circuit partially reversed the
district court's grant of summary judgment in favor of the second servicer on
the borrower's FCRA claims but affirmed its grant of summary judgment in favor
of the second servicer and the law firm on the FDCPA claims. Most
significantly, the court held that the law firm's failure to notify the credit
reporting agency that the debt was disputed or take steps to reverse the
negative credit reports did not constitute an FDCPA violation. Although the law
firm was aware that the negative credit reports had been made in error, it had
never reported the debt to a credit reporting agency, the court found.
Concurring with the Eighth Circuit's 2008 opinion in Wilhelm v. Credico,
Inc. [enhanced version], the court concluded
that the firm was neither obligated to inform the agency of the dispute nor
under any affirmative duty to reverse the negative reports.
The court also dispensed with the borrower's FDCPA claims
against the second servicer. It held that, because the borrower's loan was not
in default at the time it was obtained by the second servicer, the second
servicer was not a "debt collector" within the meaning of the FDCPA.
On the FCRA claims, the second servicer argued that the
borrower did not provide sufficient evidence of damages to survive summary
judgment. The 10th Circuit disagreed, holding that although the
borrower failed to provide sufficient evidence to support his claims of
economic damages, his own affidavit regarding his deteriorated health and
depression was sufficient to create a genuine dispute as to whether the
servicer's actions caused him emotional damages. The court further held that
summary judgment was not appropriate on whether an FCRA violation had occurred.
The 10th Circuit found there was a "genuine dispute of
fact" as to whether the servicer's reporting of the borrower's non-payment
without also reporting the underlying dispute created a "materially
misleading impression" in violation of FCRA.
The 10th Circuit did agree with the district
court's grant of summary judgment in favor of the second servicer on the
plaintiff's claim that the servicer's alleged FCRA violation was
"willful." According to the 10th Circuit, the servicer's
delay in removing the negative credit reports did not rise to the level of an
"intentional violation" or a violation in "reckless disregard of
its [FCRA] duties" as required for recovery of statutory or punitive
damages by the FCRA's willful violation provision.
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