Fifth Circuit Rules Texas Debt Collection Statute Not Preempted by HOLA

Case: Barzelis v. Flagstar Bank F.S.B.

Issue: Whether a plaintiff’s challenge of a foreclosure under the Texas Debt Collection Act (TDCA) is preempted by the Home Owners Loan Act (HOLA), and separately, whether the plaintiff qualifies as a “borrower” under the Real Estate Settlement Procedures Act (RESPA).

Case Summary: The U.S. Court of Appeals for the Fifth Circuit reversed in part a Texas federal district court decision by holding that a plaintiff’s challenge to a foreclosure under the TDCA is not preempted by HOLA. The Fifth Circuit also rejected the district court’s determination that the plaintiff was not considered a “borrower” under RESPA because the plaintiff was not listed on the mortgage note.

Plaintiff Stacy Barzelis filed for Chapter 13 bankruptcy relief after her husband died. The trustee continued to send loan payments to Flagstar Bank F.S.B. (Flagstar) on her behalf, but Flagstar refused to accept the payments because she was not listed as the borrower on the note. Flagstar began foreclosure proceedings, and thereafter Barzelis sued in state court for wrongful disclosure. Flagstar then removed the suit to federal court, and Barzelis amended her complaint to include state law claims of breach of contract, negligent misrepresentation, and violations of the TDCA. Separately, Barzelis alleged that Flagstar violated RESPA by failing to respond to her Qualified Written Requests (QWRs).

The district court dismissed all of Barzelis’ state law claims by holding they are all preempted by HOLA. In addition, the court ruled Barzelis lacked standing to bring a RESPA claim because she is not listed as the borrower on the note and therefore not authorized to send a QWR.

On appeal, the Fifth Circuit affirmed the district court’s decision that Barzelis’ breach of contract and negligent representation claims are preempted by HOLA, but reversed on Barzelis’ TDCA claim. The Fifth Circuit ruled that the TDCA resembles a statute of general application and therefore is not preempted by HOLA because the law is consistent with the “safe and sound operation of federal savings associations” with the essential purpose to “limit coercive and abuse behavior by all those seeking to collect debts.”

The Fifth Circuit also rejected the district court’s determination that Barzelis did not qualify as a “borrower” under RESPA, holding that the court failed to consider how Texas’ community-property system affects her rights in the property following her husband’s death. The Court explained that Barzelis, as the survivor to her husband’s interest in the property subject to their community debt, was the successor-debtor on the note and was the legal borrower. The Fifth Circuit did not elaborate on whether Barzelis met any requirement of establishing her status as a borrower, but decided that the district court is best suited to consider the issue on remand.

Bottom Line: The ruling will raise questions about how to define a “borrower” under RESPA.