Collecting on a debt could subject you to litigation for failing to maintain proper licensure
While a debt collector is subject to licensure in 36 states, courts continue to clarify the specific activity that makes a purchaser of debt fall into the definition of a debt collector. Debt collectors must know if licensure is required when purchasing mortgages within a state because the failure to properly understand the requirements could subject purchasers to litigation.
Recently, a federal court in Maryland declined to dismiss a claim that the owner of a mortgage loan operated without a license under the Maryland Collection Agency Licensure Act (“MCALA”) and was therefore illegally operating and making “threats” in violation of the Fair Debt Collection Practice Act (“FDCPA”)i.
As purchasers of debt, financial institutions could be subject to state licensure requirements without realizing it. The definition of a debt collector in Maryland applies to debt purchasers who directly or indirectly engage in the business of collecting a debt if the purchased mortgage was in default when the debt collector acquired the claimii.
Failure to comply with the Maryland statute could subject the financial institution to action taken by the state. The Maryland licensure statue does not provide a private right of action. In order for a private person to have a cause of action against the financial institution that company must have violated the FDCPA. Violating the Maryland statute does not automatically mean a company violated the FDCPA. A plaintiff must show the financial institution is operating illegally (by violating the state licensure law) and in violating the state law, the company engaged in conduct violating the FDPCA. If shown, the financial institution could face legal repercussions by the state as well as legal repercussions by the private citizen resulting in remedies of attorney’s fees and payment for a plaintiff’s claim of emotional distressiii.
For a plaintiff to have a remedy against a financial institution purchasing debt it must be established that the financial institution is operating as a “debt collector” under the FDCPA. The financial institution will fall under an exemption provided in the FDCA if the institution qualifies as a “creditor”. The FDCPA exempts creditors from liability because, they are motivated by the desire to protect their good will when collecting past due accounts. Courts have found a financial institution to be a debt collector rather then a creditor under the following circumstances;
1. When a company purchases a mortgage debt that is already in default, establishing that the purpose of the purchase was not to create an ongoing relationshipiv.
2. If it can be shown that the debt was purchased solely for the purpose of collectionv.
If a purchaser of debt can show it offers services that build an ongoing relationship, such as mortgage modifications, it is possible to avoid falling under the FDCPA “debt collector” definition.
If a purchaser of debt falls under the FDCPA definition of a “debt collector” any action the debt collector takes to receive payment on the debt could be seen as a “threat,” violating the FDCPA and requiring a collection agency license.
Failing to comply with state laws could lead to fines, lengthy litigation and a diminished reputation. LicenseLogix can help your business determine whether it would be considered a debt collector under the jurisdictional laws and help you obtain the proper licensing.i See generally, Ademiluyi v. PennyMac Mortg. Inv. Trust Holdings I, LLC, ELH-12-0752, 2013 WL 932525 (D. Md. Mar. 11, 2013).
ii Md. Code Ann., Bus. Reg. § 7-301 (West).
iii See generally, Ademiluyi v. PennyMac Mortg. Inv. Trust Holdings I, LLC, ELH-12-0752, 2013 WL 932525 (D. Md. Mar. 11, 2013).
iv See Schlosser v. Fairbanks Capital Corp., 323 F.3d 534, 538 (7th Cir. 2003).
v See McKinney v. Cadleway Props., Inc., 548 F.3d 496, 502 (7th Cir.2008).