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A mortgage servicer servicing loans for another entity is generally subject to the Fair Debt Collection Practices Act (FDCPA), which imposes liability for communications to a borrower containing false, deceptive or misleading representations. The FDCPA affords a narrow carve-out to the general rule of strict liability: The "bona fide error" defense, as construed by the courts, is designed to protect against liability for genuine errors such as clerical or factual mistakes. (The defense is not available for mistakes of law or misinterpretations of the FDCPA's requirements.) To successfully assert this defense, a debt collector must establish all three of the following conditions; that the violation: (1) was not intentional; (2) was the result of a bona fide error; and (3) occurred despite the maintenance of procedures reasonably adapted to avoid the error.

A recent federal district court case¹ illustrates a winning application of the bona fide error defense. The borrower had filed a class-action suit against both the servicer and the owner of the loan, based on the servicer having sent two monthly billing statements which did not reflect credit for the amount recovered from a completed foreclosure sale, and after the debt had been discharged in bankruptcy.² 

The servicer received a transfer of the servicing of the loan after the loan was already in default and the debt had been discharged in a Chapter 7 bankruptcy proceeding. The property was sold at a foreclosure sale nine months later for an amount covering most of the outstanding principal balance. The servicer originally coded the account in its system as a foreclosure, which automatically prevented any statements from being issued. However, during the month after the foreclosure sale, an employee of the servicer erroneously changed the code, and as a result, two statements were sent to the borrower showing an amount due with no credit for the amount recovered from the foreclosure sale.

The fourth page of each statement, however, included a pre-printed disclaimer stating, "To the extent that your obligation has been discharged or is subject to an automatic stay of bankruptcy this notice is for compliance and informational purposes only and does not constitute a demand for payment or any attempt to collect such obligation." Additionally, the servicer's evidence established that it maintains policies and procedures for FDCPA compliance; chiefly, a nine-page FDCPA policy which includes detailed explanations of the Act's requirements and prohibitions, including numerous examples of false, deceptive or misleading representations. The servicer also demonstrated that it requires all employees in servicing roles to complete assigned courses regarding FDCPA and other legal obligations on a regular basis, and that the company has a 126-page online FDCPA training course.

The loan had been correctly coded as a foreclosure when the servicer assumed its servicing responsibilities, and it sent no statements until the error was made. The employee was bound to follow the servicer's checklist, which did not call for changing the code or issuing billing statements. Had the employee simply followed the checklist and abided by the servicer's FDCPA training, she would not have reactivated the loan and the borrower would not have received the billing statements. Further, the servicer ceased communications to the borrower when the error was discovered.

Because the error (1) was not intentional; (2) was the result of a bona fide error; and (3) occurred despite the maintenance of procedures reasonably adapted to avoid the error, the court held that the servicer had fulfilled all three of the requirements to be entitled to the bona fide error defense and granted summary judgment in favor of the servicer.

With regard to the owner of the loan, the court found it was an investment trust, and there was no evidence that it had engaged in any business whose principal purpose was the collection of debts. Therefore, the court held that the owner of the loan did not fall within the FDCPA's definition of a debt collector, and the FDCPA was inapplicable to it.

Servicers are strongly advised to review their policies, procedures, and training programs for the inclusion of provisions relative to FDCPA compliance. These actions will help to ensure that any potential FDCPA violations occur only as a result of unintentional and bona fide errors and in spite of documented, reasonable preventive measures.

For additional information on how Weltman, Weinberg & Reis Co., LPA can assist you with auditing or designing your FDCPA compliance program, please reach out to the author or to your Weltman attorney.


¹ Arnold v. Bayview Loan Servicing, LLC, (2016) Dist. Ct., SD Alabama case no. 14-0543-WS-C.
² The plaintiff did not include a claim alleging a violation of the bankruptcy discharge injunction, as such a claim may only be brought in the bankruptcy court.