Short-Sale Denial Letters and Loss-Mitigation Merits Challenges Fall Outside FDCPA “Debt Collection” and RESPA/Regulation X NOE Coverage

1. Introduction

Janice Ellery and Lilian Patino (the “Plaintiffs”) defaulted on separate residential mortgage loans serviced by Fay Servicing, LLC (“Fay”). Each pursued a loss mitigation path through a proposed short sale. Fay denied their requests, stating the proposed sales were not “arm’s-length transactions.” The Plaintiffs then submitted notices of error (“NOEs”) challenging the denials. Fay did not provide further explanation or approve the short sales. Plaintiffs sued.

Two federal consumer-protection frameworks framed the litigation:

• FDCPA (Ellery only): Ellery alleged Fay violated 15 U.S.C. § 1692e(10) by sending denial letters (“the Denials”) that allegedly falsely stated the short sale was not arm’s-length.
• RESPA / Regulation X (both Plaintiffs): Plaintiffs alleged Fay violated 12 C.F.R. § 1024.35(e) and 12 U.S.C. § 2605(e), (k) by failing to adequately respond to their NOEs.

The district court dismissed the complaint for failure to state a claim and later dismissed with prejudice for lack of prosecution when no amended complaint was filed. On appeal, the Eleventh Circuit reviewed the earlier merits dismissal and affirmed.

2. Summary of the Opinion

A. Appellate review not blocked by the later “lack of prosecution” dismissal

The court held that an appeal from the final judgment brings up for review “all prior non-final orders and rulings which produced the judgment,” so Plaintiffs’ failure to challenge the later dismissal with prejudice for lack of prosecution did not prevent review of the earlier dismissal for failure to state a claim.

B. FDCPA claim fails because the Denials were not “in connection with the collection of any debt”

Even though the Denials included a footer stating Fay is a debt collector, the court held the Denials—viewed holistically—did not seek payment, state an amount due, threaten consequences of nonpayment, or otherwise aim to induce payment. They were responses to Ellery’s short-sale submissions, and therefore lacked the required nexus to debt collection.

C. RESPA/Regulation X NOE claim fails because Plaintiffs challenged loss-mitigation merits, not covered “servicing” errors

The court held that NOEs disputing Fay’s denial of short sales as not arm’s-length were challenges to the merits of loss-mitigation determinations, not “covered errors” relating to “servicing.” Section 1024.35(b)(7) (referencing § 1024.39) did not apply because Plaintiffs were not complaining about required delinquency notices describing loss-mitigation availability. The catch-all § 1024.35(b)(11) did not apply because challenges to the merits of loss-mitigation determinations are excluded. Accordingly, Fay had no duty to respond under the NOE framework.

3. Analysis

3.1. Precedents Cited

Procedural scope of appellate review

• Mickles v. Country Club Inc., 887 F.3d 1270 (11th Cir. 2018)
  
  The Eleventh Circuit relied on Mickles for the rule that an appeal from a final judgment brings up prior interlocutory orders “which produced the judgment.”

  This resolved Fay’s threshold argument that Plaintiffs had to separately challenge the later “lack of prosecution” dismissal; they did not. The court treated the earlier Rule 12(b)(6) dismissal as properly before it.

Standards of review (framing the court’s posture)

• Henderson v. Washington Nat. Ins. Co., 454 F.3d 1278 (11th Cir. 2006)
  

  Cited for de novo review of a Rule 12(b)(6) dismissal, taking well-pleaded facts as true and construing them favorably to plaintiffs. Its inclusion underscores that the affirmance was legal, not a factual sufficiency call requiring evidence.

• Owner-Operator Indep. Drivers Ass'n, Inc. v. Landstar Sys., Inc., 622 F.3d 1307 (11th Cir. 2010)
  

  Cited for de novo review of statutory and regulatory interpretation—critical in the Regulation X analysis.

FDCPA “in connection with the collection of any debt” nexus

• Lamirand v. Fay Servicing, LLC, 38 F.4th 976 (11th Cir. 2022)
  

  Lamirand supplied the controlling nexus test: a communication qualifies if it “conveys information about a debt and its aim is at least in part to induce the debtor to pay,” and the court must view the message “holistically.” The court used this framework to distinguish short-sale denial letters from collection attempts.

• Caceres v. McCalla Raymer, LLC, 755 F.3d 1299 (11th Cir. 2014)
  

  Quoted via Lamirand for the “aim is at least in part to induce the debtor to pay” formulation, reinforcing that intent/function matters, not merely the sender’s identity.

• Daniels v. Select Portfolio Servicing, Inc., 34 F.4th 1260 (11th Cir. 2022)
  

  Daniels provided a multi-factor, context-driven approach and a key caution: “this is an attempt to collect a debt” language can matter, but is not automatically dispositive. The court contrasted Daniels’ mortgage statements (which can include amounts due, due dates, late fees, and collection context) with the Denials here (which did none of that).

• Reese v. Ellis, Painter, Ratterree & Adams, LLP, 678 F.3d 1211 (11th Cir. 2012)
  

  Cited through Daniels for the proposition that a document can plausibly be debt-collection-related when it demands a specific payment by a date and threatens consequences like fees. The court used Reese as a benchmark of what “collection” indicia look like—indicia absent from the Denials.

• Grden v. Leikin Ingber & Winters PC, 643 F.3d 169 (6th Cir. 2011)
  

  Used to distinguish “ministerial response to a debtor inquiry” from a strategy “to make payment more likely.” The Eleventh Circuit applied this logic by characterizing the Denials as responses induced by Ellery’s short-sale application submissions, not as payment-inducing outreach.

• Dyer v. Select Portfolio Servicing, Inc., 108 F. Supp. 3d 1278 (M.D. Fla. 2015)
  

  Cited in support of the proposition that letters sent in response to debtor inquiries are “induced by the debtor and not the debt collector,” and thus may fall outside the FDCPA’s collection scope. While not binding, Dyer illustrates how district courts in the circuit have operationalized the “response vs. collection attempt” distinction.

• Access Now, Inc. v. Sw. Airlines Co., 385 F.3d 1324 (11th Cir. 2004)
  

  The court invoked Access Now to refuse consideration of an FDCPA theory raised for the first time on appeal (that Fay’s failure to explain or cooperate itself violated the FDCPA). This reinforces issue-preservation discipline in FDCPA litigation.

RESPA / Regulation X NOEs: covered errors, servicing, and loss mitigation limits

• Cilien v. U.S. Bank Nat'l Ass'n, 687 F. App'x 789 (11th Cir. 2017)
  

  Cited to reject a § 1024.39-based NOE theory where the plaintiff failed to allege how/when the servicer contacted her after default. Here, Plaintiffs likewise challenged denial conduct, not the timing/content of delinquency notices required by § 1024.39.

• Naimoli v. Ocwen Loan Servicing, LLC, 22 F.4th 376 (2d Cir. 2022)
  

  Central to the court’s catch-all analysis. The Eleventh Circuit acknowledged Naimoli’s key distinction: covered errors can include servicing-related mishandling (documents, recording, payment processing) even if they arise in a loss-mitigation narrative, so long as the borrower is not simply disputing the “merits” of the loss-mitigation decision.

  The court distinguished Naimoli because the Plaintiffs here alleged “nothing wrong other than” the denial based on the arm’s-length determination—i.e., a direct merits challenge.

• Fustolo v. Select Portfolio Servicing, Inc., 123 F.4th 528 (1st Cir. 2024)
  

  Cited for the proposition that challenges to the merits of evaluating a loss-mitigation application do not relate to “servicing” and therefore are not covered errors under RESPA/Regulation X. This aligns the Eleventh Circuit with an emerging multi-circuit consensus limiting NOEs to servicing errors rather than underwriting/eligibility decisions.

• 78 FR 10696-01
  

  The court relied on the regulator’s expressed choice to exclude “a servicer's failure to correctly evaluate a borrower for a loss mitigation option” as a covered error. This administrative history buttressed a narrow reading of § 1024.35(b)(11)’s catch-all.

3.2. Legal Reasoning

A. FDCPA: disclaimer language does not convert a loss-mitigation denial into debt collection

The court’s FDCPA analysis turned on function and context. Under 15 U.S.C. § 1692e, prohibited conduct must occur “in connection with the collection of any debt.” Even assuming a false statement (arm’s-length vs. not arm’s-length), liability attaches only if the statement is tied to collection activity.

Applying Lamirand and Daniels, the court asked whether the Denials: (1) conveyed debt information and (2) aimed at least in part to induce payment. The court emphasized what the Denials did not do:

• They did not identify the balance due.
• They did not demand payment.
• They did not set a due date or request remittance.
• They did not threaten fees, foreclosure steps, or other consequences for nonpayment.

The only “collection-adjacent” marker was the footer: “Fay Servicing, LLC is a debt collector, and information you provide to us will be used for that purpose.” But Daniels cautioned that such language is not dispositive. The court treated it as one factor that cannot outweigh the document’s overall purpose: a denial of a requested short sale transaction.

Finally, the court bolstered the “not collection” conclusion by characterizing the Denials as responses “induced by” the borrower’s own submissions, citing Grden (and the supportive district-court reasoning in Dyer).

B. RESPA / Regulation X: NOEs cover “servicing” errors, not merits of loss-mitigation decisions

The Regulation X NOE framework in 12 C.F.R. § 1024.35 compels servicer responses only for enumerated “covered errors” (including a catch-all: “[a]ny other error relating to the servicing” of a loan, § 1024.35(b)(11)). The court anchored its analysis in the regulation’s definition of “servicing” (12 C.F.R. § 1024.2(b)): receiving scheduled periodic payments and making payments to owners/third parties as required.

1) Section 1024.35(b)(7) / Section 1024.39 mismatch

Plaintiffs argued their NOEs implicated § 1024.35(b)(7), which concerns failure to provide accurate information about loss-mitigation options “as required by § 1024.39.” The court rejected this because § 1024.39 is a delinquency-notice provision: it requires periodic written notices (generally by day 45 and thereafter while delinquent) describing the availability of loss-mitigation options and how to get more information.

The NOEs did not complain about failure to provide those notices. They complained about denial of specific short sale offers. Moreover, even if Plaintiffs were trying to reframe their dispute as a § 1024.39 notice problem, they did not plead facts about how or when Fay communicated with them after default, a deficiency highlighted by Cilien v. U.S. Bank Nat'l Ass'n.

2) Catch-all § 1024.35(b)(11): “processing” labels cannot disguise a merits challenge

Plaintiffs attempted to characterize their NOEs as challenging “processing” or “implementation” errors rather than the “evaluation” of loss mitigation. The Eleventh Circuit rejected this reframing as inconsistent with the substance of the NOEs: the alleged “error” was Fay’s conclusion that the offers were not arm’s-length and the resulting denial of the short sales.

The court supported its reading through:

• 78 FR 10696-01: the regulator declined to treat “failure to correctly evaluate” loss mitigation as a covered error.
• Naimoli v. Ocwen Loan Servicing, LLC: while servicing-related mishandling can be a catch-all covered error even in a loss-mitigation context, a direct “merits” challenge to the loss-mitigation determination is excluded.
• Fustolo v. Select Portfolio Servicing, Inc.: merits challenges to loss-mitigation evaluations do not relate to servicing and therefore are not covered errors.

Unlike Naimoli—where alleged errors (recording failures, rejected payments, document handling) were correctable without overturning the loss-mitigation decision— the Plaintiffs here sought to attack the denial rationale itself. That put the NOEs outside § 1024.35’s covered-error universe, and thus outside § 1024.35(e)’s response obligations.

3.3. Impact

FDCPA: clearer boundary between loss-mitigation communications and debt collection

This decision reinforces that communications about loss mitigation (here, short sale denials) are not automatically “in connection with the collection of any debt,” even when sent by a “debt collector” and even when they contain a debt-collector disclaimer. Practically, plaintiffs will need to plead (and ultimately prove) collection indicia—demand for payment, amounts due, threats, deadlines, or context suggesting a payment-inducing strategy.

RESPA/Regulation X: NOEs are not a vehicle to relitigate short sale denials

The opinion strengthens a limiting principle: NOEs are for servicing errors, not for second-guessing a servicer’s substantive loss-mitigation determinations (e.g., whether a short sale is arm’s-length). Borrowers who want to contest such determinations may need to rely on other legal theories and regimes (e.g., contractual obligations in servicing agreements, state consumer laws, or specific Regulation X loss-mitigation provisions where applicable), but § 1024.35’s NOE response mechanism is not a general-purpose appeals process for loss-mitigation denials.

Cross-circuit alignment

By relying on Naimoli (2d Cir.) and Fustolo (1st Cir.), the Eleventh Circuit positions itself within a growing consensus: Regulation X’s NOE framework does not extend to the “merits” of loss mitigation evaluation outcomes. At the same time, it preserves Naimoli’s nuance that true servicing errors remain actionable even if they arise in the shadow of loss mitigation.

4. Complex Concepts Simplified

5. Conclusion

The Eleventh Circuit’s affirmance crystallizes two practical rules. First, a short-sale denial letter—even one bearing debt-collector boilerplate—does not fall under the FDCPA unless it is, in substance and context, aimed at inducing payment on the debt. Second, Regulation X NOEs do not obligate servicers to respond when the alleged “error” is the servicer’s substantive loss-mitigation decision (here, denial of short sales as non-arm’s-length), because such disputes do not constitute covered servicing errors under § 1024.35. In combination, the opinion narrows federal consumer-claim pathways for borrowers seeking to contest short-sale denials, channeling such disputes away from FDCPA § 1692e and RESPA/NOE theories.