Premature Foreclosure: Collection of Debt

Scenario: A borrower has a mortgage that is owned by Wells Fargo. Wells Fargo later assigned the loan to Washington Mutual. Before the mortgage was actually transferred to Washington Mutual, Washington Mutual filed a foreclosure suit complaint alleging ownership of the property. The allegations in the complaint were false because Washington Mutual did not take ownership of the mortgage until a month later. The borrower then sued Washington Mutual stating that Washington Mutual made “false, deceptive or misleading representations” that violated FDCPA.

Court history: The trial court dismissed the case. The consumer appealed the case and the U.S. Court of Appeals for the Sixth Circuit found that the misrepresentation about the name and the difficulties the consumer claimed were enough to describe a material misrepresentation. The court noted that the statements made in the foreclosure suit complaint were misleading. This finding was based on whether the least sophisticated consumer would have been misled. The statement must not only be technically false but it must be materially false such that it would mislead or confuse the consumer. The court found that the statements made in the foreclosure suit complaint satisfied both requirements. A false statement as to the creditor’s name can be a false representation. Even is state law would allow Washington Mutual to sue anticipating that they would be the rightful owner of the loan prior to the foreclosure, it would be irrelevant to whether the misrepresentation was material.

Practical application: There are many things that can make a foreclosure premature. The validity of a foreclosure can be disputed. If documents were not in order or the mortgage company did not go through the proper steps prior to foreclosure, the borrower may have other avenues to contact the foreclosure. Another foreclosure that can be determined invalid is where a state requires court permission to proceed with foreclosure. However, in some cases the court permission has not actually been obtained prior to foreclosure. In these circumstances, the borrower may have standing to sue either to void the foreclosure or for sanctions from the borrower for failure to comply with state law. In St. Louis County a foreclosure may be incorrect if the mortgage company foregoes the now mandatory mediation prior to foreclosure. In these cases, foreclosure may be allowed to go through but the mortgage company may be subject to a fine for completing the foreclosure without going through the mandatory mediation process.