Consumer Finance Litigation

In Schlegel v. Wells Fargo Bank, N.A., 2013 WL 3336727, (9th Cir. July 3, 2013), the Ninth Circuit held that Wells Fargo did not qualify as a "debt collector" under the Fair Debt Collection Practices Act ("FDCPA"), even though the mortgage debt it sought to collect was in default at the time it was assigned to Wells Fargo. The facts of this case are relatively simple. After the plaintiffs' defaulted loan was assigned to Wells Fargo, the plaintiffs entered into a loan modification agreement with Wells Fargo and proceeded to make payments under the agreement. However, Wells Fargo began mistakenly sending the plaintiffs a series of default letters which threatened acceleration and foreclosure. In turn, the plaintiffs sued Wells Fargo for violations of the FDCPA and the Equal Credit Opportunity Act ("ECOA"). Wells Fargo moved to dismiss the FDCPA claim, arguing that it was not a "debt collector" as defined by the FDCPA. The district court agreed, finding that Wells Fargo fell within the FDCPA's definition of "creditor," rather than a "debt collector," and, thus , that it was not subject to the statute's provision. The court rejected the plaintiffs' argument (and the common refrain) that one cannot be a "creditor" under the FDCPA when it receives an assignment of a defaulted debt for the purposes of collecting debts due to another. The court found that Wells Fargo did not fall within this exception because there was no allegation that Wells Fargo collected the plaintiffs' debt on behalf of another party. On appeal, the Ninth Circuit affirmed the lower court's holding that Wells Fargo did not fall within the definition of a "debt collector" under the statute. The court examined whether Wells Fargo fell within either definition of "debt collector" under the FDCPA: (1) "any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts," and (2) any person "who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another." With respect to the first definition, the court found that the complaint failed to plead facts showing that the principal purpose of Wells Fargo's business was debt collection. The court likewise rejected application of the second definition, finding that the complaint did not allege that Wells Fargo regularly collects debts owed to someone other than Wells Fargo. Because the loan and deed of trust were assigned to Wells Fargo when it began servicing the loan, "Wells Fargo's collection efforts in this case relate only to debts owed to itself." 2013 WL 3336727, at 4. The court stated, "The statute is not susceptible to the Schlegels' interpretation that 'owed or due another' means 'originally owed or due another.'" Id. The Ninth Circuit also reversed the district court's dismissal of the plaintiffs' ECOA claim, finding that Wells Fargo's mistaken acceleration of the loan while the plaintiffs were making payments amounted to an adverse action that required Wells Fargo to give notice under the statute. Id. at 6. For more information on consumer finance litigation topics, please contact one of the Burr & Forman team members for assistance. We are happy to answer any questions or concerns you may have.