Janice Ellery and Lilian Patino defaulted on residential mortgages serviced by Fay Servicing, LLC. They attempted to sell their homes through short sales, but Fay denied their applications, stating the offers were not arm's-length transactions. The plaintiffs submitted Notices of Error (NOEs) challenging these denials and alleging violations of the Fair Debt Collection Practices Act (FDCPA) and the Real Estate Settlement Procedures Act (RESPA). The district court dismissed the complaint for failure to state a claim, ruling that the servicer's actions did not fall within the statutory definitions of debt collection or covered servicing errors. The plaintiffs appealed, arguing the denials were deceptive and that the NOEs properly identified servicing errors.
The court addressed two primary statutory issues. First, regarding the FDCPA, the court applied a holistic view to determine if the denial letters were sent 'in connection with the collection of any debt.' The court found that the letters merely rejected a short sale request without identifying the debt balance, demanding payment, or mentioning consequences of nonpayment. Although the letters contained a standard debt collector disclosure, the court held that without other indicators of collection intent, the communications were ministerial responses to the borrowers' applications rather than debt collection efforts. Second, regarding RESPA, the court analyzed whether the plaintiffs' NOEs alleged a 'covered error.' The court noted that while borrowers can challenge errors in the servicing of a loan, the regulations explicitly exclude challenges to the merits of a servicer's loss mitigation determination. The plaintiffs argued they were challenging the 'processing' of the offers rather than the 'evaluation,' but the court rejected this distinction. The court concluded that denying a short sale based on arm's-length status is a loss mitigation determination, and thus, the servicer had no obligation to respond to the NOEs under RESPA.
This decision limits the ability of borrowers to use the FDCPA to challenge routine communications regarding loss mitigation denials and clarifies that RESPA's error correction procedures do not apply to disputes over the substantive merits of a servicer's loss mitigation decision. The case is remanded to the district court with instructions to dismiss the complaint with prejudice, as the plaintiffs failed to amend their complaint after the initial dismissal.
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