Fair Debt Collection: 13.7.3.4 Midland Funding Does Not Affect FDCPA Enforcement of Stale Claims Outside of Bankruptcy
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§ 1006.26 Collection of time-barred debts.
a) Definitions. For purposes of this section:
(1) Statute of limitations means the period prescribed by applicable law for bringing a legal action against the consumer to collect a debt.
(2) Time-barred debt means a debt for which the applicable statute of limitations has expired.
The preemption doctrine has its roots in the Supremacy Clause of the U.S. Constitution and is implicated when state law interferes with or is contrary to federal law.472 The issue of Bankruptcy Code preemption of state fair debt collection claims arises in a group of cases that also focus on whether the Bankruptcy Code itself creates a private right of action to enforce the discharge injunction. The Sixth Circuit first considered the issue in Pertuso v.
Since the mid-nineteenth century, the discharge of debts has been a primary objective of American bankruptcy laws.493 Throughout the early twentieth century, courts construing the Bankruptcy Act emphasized the importance of the discharge that relieved “the honest debtor from the weight of oppressive indebtedness” and gave the debtor the opportunity to “start afresh free from the obligations and responsibilities” of prior debts.494
While Spokeo recognized that Congress could “elevate” a particular harm to the level of a legally cognizable injury for Article III standing purposes, the Ramirez decision added uncertainty to the role of Congressional enactments in authorizing standing to sue.500 Despite this lack of clarity, advocates can point to several factors that
The Bankruptcy Code in section 362(k)309 contains a specific cause of action against a creditor who causes injury310 to an individual311 by a willful violation of the section 362 stay.312 A willful violation is one committed knowingly; no malice need be shown.313 When an agent commits an act on behalf of a principal, both the principal and agent can be h
In addition to remedies under section 362(k), the debtor also has remedies for violation of the automatic stay as contempt of a court order.344 The legislative history of section 362(k) (formerly designated as section 362(h)) makes clear that Congress was granting an additional remedy to debtors beyond those already in existence.345 Neither remedy may be available, however, if it was unclear whether an act was barred by the stay.346
Advocates have recourse to a substantial history of court rulings that award compensatory damages for violations of the discharge order and automatic stay.504 The types of injury found compensable in these rulings should be sufficiently concrete to establish Article III standing. For as long as they are in effect, both the automatic stay and the discharge order prohibit naming the debtor as defendant in a collection action and entering judgment against the debtor.
A variety of federal and state causes of action, under both statutory and common law, can be used to attack foreclosure rescue scams. Many of these claims begin with the premise that the homeowner’s transfer of title to the property, whether in the form of a sale-leaseback or an inter vivos trust, was not absolute and was merely intended to provide security for a loan. The equitable mortgage doctrine allows the court to treat the sale as a mortgage in these circumstances.
Under the common law equitable mortgage doctrine,153 as well as some state statutes,154 courts recognize that a “sale” with a repurchase option may actually be a loan and that the deed at issue should be construed as an equitable mortgage.155 Courts have frequently used the equitable mortgage doctrine to find that a foreclosure rescue transaction purporting to be a sale was actually a loan.156 The que
Rescuers often sell or encumber the property quickly after gaining title, which may cut off the homeowner’s ability to recover the property.
TILA requires a creditor to disclose certain important information about the credit terms to the consumer in writing prior to consummation of a credit transaction. The Act also provides more substantive protections.271 Failure to comply with the disclosure requirements or substantive restrictions may give rise to claims for actual damages,272 statutory damages,273 and attorney fees.274
Under TILA, assignees are always liable for rescission, to the same extent as the original creditor.285 However, in order to exercise TILA rescission in the sale-leaseback context, the homeowner must first convince the court to apply the equitable mortgage doctrine to void the transfer deed and convert the sale into a loan subject to TILA.
In 1994, Congress passed the Home Ownership and Equity Protection Act (HOEPA), designed to prevent some predatory lending practices.289 HOEPA, which is part of TILA, applies to high-cost loans. It imposes additional requirements on lenders and gives consumers additional remedies for violations. Whether a loan is high cost depends on the APR, the total “points and fees,” or the terms of any prepayment penalty.
The following is an example of how to determine if a foreclosure rescue transaction exceeds the HOEPA APR trigger. Foreclosure rescue scams are structured in a variety of ways, however, so other ways of determining the APR may be appropriate for a particular case.
The HOEPA points and fees trigger is based not on the APR but on charges such as prepaid finance charges and broker fees that are paid directly or indirectly by the consumer, at or before closing, as an incident to or a condition of the loan. Certain closing costs can also count toward the points and fees trigger if they are inflated or paid to affiliates, or if the creditor receives a portion of the charge.
For transactions for which the creditor received an application on or after January 10, 2014,872 the regulation prohibits a creditor from extending an open-end, high-cost mortgage without regard to the consumer’s repayment ability at account opening. This assessment must include consideration of:
Once a loan is determined to be subject to HOEPA, several additional prohibitions and requirements kick in, beyond those in TILA generally.304 Most are relevant only to traditional loans, but some are useful in dealing with foreclosure rescue scams.
An important aspect of HOEPA is its expanded assignee liability: assignees of covered mortgages are liable for all claims and defenses that the consumer could assert against the originator, except to the extent of certain limitations on damages discussed below.310 This expansion of liability even covers claims and defenses that can be raised against the original lender under common law, statutes, or other theories.
Violations of HOEPA are subject to three remedies:316 First, violations of HOEPA entitle the consumer to actual damages and TILA statutory damages.
In January 2011, rules promulgated by the Federal Trade Commission (FTC) regulating “mortgage assistance relief services” (MARS) became fully effective.322 The MARS rule prohibits various forms of misconduct associated with for-profit services that are represented to help homeowners avoid foreclosure.