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Debt Collection Law Firms Must Follow FDCPA in Foreclosure Cases, Court Says

A federal judge has ruled that debt collection law firms are subject to the rules of the Fair Debt Collection Practices Act in cases dealing with mortgage foreclosures. U.S. District Judge Timothy J. Savage of the Eastern District of Pennsylvania denied a motion by law firm Phelan Hallinan Diamond & Jones seeking to dismiss plaintiffs Tina Collins and Glendale Walker's FDCPA claim, which alleged the firm failed to cease all collection activity before verifying the debt after the plaintiffs first disputed it. Savage did, however, dismiss the rest of the plaintiffs' claims for failure to state a claim for which relief could be granted. According to Savage's opinion, the plaintiffs alleged that the foreclosure complaint and Phelan Hallinan’s response to their notice of dispute "'contained false and misleading representations thru [sic] deceptive means in an attempt to collect a debt.'" Collins and Walker also claimed that the firm threatened to proceed with the foreclosure action without first verifying the debt. The plaintiffs also claimed that the firm falsely represented itself as counsel to Wells Fargo, leading Collins and Walker to believe that Phelan Hallinan was a part of Wells Fargo’s legal department, according to Savage. Phelan Hallinan denied the plaintiffs' allegations, contending that its notices were not false or misleading and that it was clear in letting the plaintiffs know that it represented Wells Fargo in the foreclosure proceeding. Savage said the firm did provide adequate verification of the debt by way of a response to the notice of dispute sent to the plaintiffs Nov. 28, 2016. "It is what happened before Phelan sent the verification letter and after the plaintiffs notified Phelan that they disputed the debt that forms the basis for a viable claim for a violation of the FDCPA," Savage said. "When the consumer notifies the debt collector that the debt is disputed, Section 1692g(b) requires the debt collector to 'cease collection of the debt' until verification is provided to the consumer. Here, according to the complaint, after Phelan threatened to foreclose on the mortgage, the plaintiffs sent a notice of dispute. Instead of ceasing collection activity, Phelan proceeded to file the foreclosure action." The case then turned on the question whether foreclosing a mortgage constituted debt collection under the FDCPA. Savage said it is. "Foreclosure, although legal in nature, is 'activity undertaken for the general purpose of inducing payment,'" Savage said. "A debt collector cannot avoid FDCPA liability simply by proceeding in rem rather than in personam. Therefore, for purposes of this action, Phelan was acting as a debt collector and engaged in debt collection activity when it communicated with the plaintiffs and filed the foreclosure action." Glendale and Collins, who represented themselves, could not be reached for comment. Matthew G. Brushwood of Phelan Hallinan represents the firm and did not respond to a request for comment.