Supreme Court Cases Could Have Significant Impact on ARM Industry

Debt collection professionals are preparing themselves for two U.S. Supreme Court opinions – one challenging the safe harbor clause for bona fide errors in the Fair Debt Collections Practices Act (FDCPA) and another which questions if a government backed student loan can be discharged through bankruptcy. Some industry observers say the outcome of both cases could have far reaching implications for some or most debt collection professionals.

Oral arguments in the case of Karen L. Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich, LPA and Adrienne S. Foster, which challenges the bona fide error defense for ARM professionals, are set for January ("U.S. Supreme Court Oral Arguments Scheduled for FDCPA Case," Dec. 8). Earlier this month, the Court heard arguments in United Student Aid Funds, Inc. v. Espinosa, a case involving the discharge of federally-backed student loans.

In the FDCPA case, lawyers for Jerman are suing Carlisle, McNellie, Rini, Kramer & Ulrich for violating the FDCPA when it attempted to foreclosure on her home. The Ohio firm required that Jerman prove in writing within 30 days that she had paid her Countrywide Home Loans mortgage; otherwise the debt would be assumed valid.  Countrywide is now owned by Bank of America. Jerman hired a lawyer to meet the Ohio firm’s written requirement, but FDCPA law does not require consumers to challenge debt claims in writing.

The Ohio firm, which specializes in real estate and foreclosure law, admitted that in its 2006 validation notice to Jerman it intended to require she dispute the claim in writing. But the law firm said it did not know that the FDCPA did not require a written dispute. After Jerman sued, the firm argued that it should not be held liable because it was an unintentional or “bona fide error” and has safe harbor protection under FDCPA.

Jerman’s lawyers have asked the court to decide if a debt collector’s legal error qualifies for the bona fide error defense under FDCPA. They contend it does not and wants the court to conclude that the bona fide error defense is “categorically unavailable for any mistake of law.”

“The presumption that ignorance of the law is no defense applies without regard to the source of the law the defendant misunderstood,” wrote Jerman’s attorneys.

Attorneys for the Ohio law firm, however, say a plain reading of the bona fide error defense includes legal errors and that Jerman’s lawyers are attempting to have it removed.

The United States government — through the Federal Trade Commission (FTC) — American Bar Association, the National Retail Association, ACA International, and attorney generals of 21 states are among the many watching to see how the high court rules. Both the U.S. District Court and the U.S. Court of Appeals Six Circuit ruled in favor of the law firm.

Several entities have weighed in with briefs, including the U.S. government, which supports Jerman’s petition. The National Association of Retail Collection Attorneys (NARCA), America’s Mortgage Banking Attorneys, the Commercial Law League of America (CLLA) and the International Association of Collection Agencies are among the organizations who submitted briefs supporting the law firm (see briefs filed in the case).  

This is only the second time the Supreme Court has heard a case questioning the interpretation of the 32-year old FDCPA statute.  In Heintz v. Jenkins (1995), the Supreme Court ruled that the FDCPA applies to attorneys who "regularly" engage in consumer debt collection activity, even when that activity consists of litigation, said Valerie Hayes, ACA International’s corporate counsel and vice president of legal and government affairs.