| Note: The following is a general discussion on the specified topic or issue and may not be relied on as legal advice in any specific case or matter you encounter. You should review any applicable case, or matter with counsel experienced in this area of law and should not generally rely on the discussion in this Alert.|
Date: August 6, 2018
To: All Scheer Law Group Clients and Affiliates
From: Spencer Scheer
Subject: Effect of Loan Charge off on Right to Accrue Interest and Credit Report.
There has been some uncertainty on the effect of recent TILA regulations (12 CFR 1026.41 (d) and (e)), requiring larger services (smaller servicers exempt) to provide notice when a closed end mortgage loan is charged off and the creditor will not be sending periodic statements. An unresolved question is whether the creditor can still accrue post-charge off interest on the loan.
While not dealing specifically, with a real estate loan and the governing regulation, a California appellate court has given guidance on the issue in the context of charged off open ended credit card debt, and the news in encouraging for lenders and debt buyers.
In Cavalry SPV I, LLC v. Watkins (2019) 36 Cal.App.5th 1070 [249 Cal.Rptr.3d 334], the appellate court held that a debt buyer on a credit card debt did not violate the CA-FDCPA or TILA by accruing interest after charge off and cessation of payment statements by the original creditor. Citing applicable TILA regulations (12 CFR §226.5(b) (2) (i)) and prior case law interpreting it) , the Court found that in the absence of an intentional waiver of the right to collect the debt or accrue interest, that TILA regulations allow a creditor a separate basis to cease sending payment statements even when a loan is charged off i.e. when debt is deemed uncollectible by the creditor. The Court found that the regulation in conjunction with specific advisements by the original creditor that it could continue to add interest to the account after charge off, did not establish the waiver of the original creditor or subsequent debt buyer to accrue and charge post-charge off interest. The Court also held that credit reporting that included post-charge off interest was not improper
Special note should be given to the fact that the holding is directed at state and federal FDCPA claims on open-ended credit card debt and does not specifically address the TILA regulations governing real estate charge off and periodic statement notices. Borrowers may still raise the distinction when challenging post-charge off accrual on a charged off real estate loan. It should also be noted that the creditor in this case specifically indicated its intention not to waive the right to accrue (evidencing non-waiver of the right). However, the holding generally supports the rights continue to accrue on charged off loans under federal and CA law, and to credit report on the accrual. Lenders and servicer and debt buyers can and should pay attention to this holding.
Please call or email if you have questions about this case.