Collecting assessments is one of the main ongoing tasks for any association. Although community association attorneys are clearly required to comply with the various state and federal fair debt collection laws, whether management companies have the same duty to comply with these laws is not quite as clear.
Under the federal Fair Debt Collection Practices Act (FDCPA), a company that handles collecting money on an account that is not in default is considered to fall outside the definition of “debt collector” for purposes of the FDCPA. However, a recent decision from the California Court of Appeal has now expanded the definition of “debt collector” under California’s Rosenthal Fair Debt Collection Practices Act (Rosenthal Act) to include mortgage servicers. As mortgage servicers act to handle debts that are not yet in default like management companies, the potential for community association managers and management companies to be sued under the Rosenthal Act just became a lot greater.
The decision issued in Davidson v. Seterus, Inc. on March 13, 2018, held that mortgage servicers can be “debt collectors” under the Rosenthal Act. In this case, Edward Davidson brought a class action lawsuit against Seterus, Inc., a mortgage service company, and its parent company, International Business Machines Corporation (IBM). Davidson alleged that he and other class members were victims of Seterus’s unlawful collection practices because Seterus had threatened him with foreclosure of his home, threatened to report negative credit information to credit bureaus and harassed him with numerous threatening phone calls, causing him emotional distress and damages. The trial court dismissed Davidson’s complaint with prejudice, concluding that Seterus and IBM were not “debt collectors” because foreclosure on a mortgage is not debt collection and a mortgage lender or mortgage servicer is not a “debt collector” for purposes of the FDCPA.
The Court of Appeal reversed the trial court’s ruling noting that California’s Rosenthal Act was meant to have a broader definition of “debt collector” than that provided in the FDCPA. It held that there is nothing in the Rosenthal Act which would exclude mortgage servicers from liability under the act. In its decision, the Court stated that “the Rosenthal Act is a civil statute enacted for the protection of the public,” and that “the statute should be construed broadly in favor of protecting the public.”
The decision in this case is significant as mortgage servicers are not usually considered debt collectors because they act to service repayment of a debt that is not yet in default. The reasoning of the Court of Appeal here could be used to argue that a community association’s management company should be liable for the same type of collection activities that Seterus engaged in to recover money from Davidson. As this decision places more weight on the alleged harassment than on whether the debt owed by Davidson was actually past due or in default, it may signal a shift in how debt collection cases in California will be decided in the future. Managers and management companies may want to reconsider any practices that involve reporting information to credit bureaus or telephoning delinquent homeowners about assessment debt, as such practices may be considered harassing to the delinquent homeowner.
Keep in mind that although liens must be approved in open session, homeowners do have privacy rights under federal and state fair debt collection laws. Therefore, it is best to conduct all discussions involving delinquent accounts in executive session.