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U.S. Supreme Court Holds FDCPA Has Extremely Limited Applicability to Persons Engaging in Nonjudicial Foreclosure Proceedings

The U.S. Supreme Court handed down its much-anticipated opinion in Obduskey v. McCarthy & Holthus LLP on March 20, ruling the federal Fair Debt Collection Practices Act does not cover persons engaged in “non-judicial foreclosures” except with respect to a single provision contained in the FDCPA.

Colorado, like many western states, has a procedure that allows a lender to foreclose property without the need to file a lawsuit.

Here, as you may recall, a Colorado borrower defaulted on his home loan and the mortgage servicer hired a law firm to pursue a non-judicial foreclosure.  The borrower informed the law firm he was disputing the debt and the law firm, without responding to the dispute, proceeded with the non-judicial foreclosure.

The borrower then filed a lawsuit against the mortgage servicer and law firm alleging, among other things, violation of the FDCPA by proceeding with the foreclosure without first providing verification of the debt in response to his dispute as required by 15 U.S.C. § 1692g(b).   The mortgage servicer and law firm filed motions to dismiss.

The FDCPA defines a debt collector as persons engaged “in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts.” The Colorado borrower alleged this included the law firm and mortgage servicer.

However, the FDCPA’s definition of a debt collector also states that “[the] term [debt collector] also includes any person . . . in any business the principal purpose of which is the enforcement of security interests” for purposes of section 1692f(6). The law believed this provision excluded its efforts undertaken in the nonjudicial foreclosure.

The trial court agreed with the law firm and mortgage servicer and granted their motions to dismiss, determining that the mortgage servicer was not a “debt collector” under the FDCPA because the loan was not in default when it began servicing the loan.[1]  The trial court also found the law firm’s nonjudicial foreclosure activities were “outside the scope of the FDCPA.”

The borrower appealed and the U.S. Court of Appeals for the Tenth Circuit affirmed the District Court’s decision, explaining that despite findings to the contrary by three other circuits (the Fourth, Fifth, and Sixth) and the Colorado Supreme Court, a nonjudicial foreclosure is not an attempt to collect money.  Therefore, the “mere act of enforcing a security interest through a non-judicial foreclosure proceeding does not fall under the FDCPA.”

The U.S. Supreme Court granted the borrower’s Petition for a Writ of Certiorari on June 28, 2018, and heard oral argument on Jan. 7.

The Supreme Court first looked to the language of the FDCPA which provides a “general” definition for “debt collector.”[2]  However, that subsection also provides: “For the purpose of section 808(6) [15 U.S.C. § 1692f(6)][3], such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests.” (emphasis added).

Focusing on the italicized terms above, and particularly the word “also,” the Court stated the phrase “strongly suggests that one who does no more than enforce security interests does not fall within the scope of the general definition.  Otherwise why add this sentence at all?”

Second, the Court explained that it makes sense to “treat security-interest enforcement differently from ordinary debt collection in order to avoid conflicts with state nonjudicial foreclosure schemes.”  As an example, the Court noted state nonjudicial foreclosures procedures include consumer protection provisions, some of which are in conflict with the FDCPA, such as the requirement to publicize the sale.

Third, the Court looked to the legislative history which evidenced conflicting proposals regarding the applicability of the entire FDCPA to persons who enforce security interests.  “Given these conflicting proposals, the Act’s present language has all the earmarks of a compromise: The prohibitions contained in §1692f(6) will cover security-interest enforcers, while the other ‘debt collector’ provisions of the Act will not.”

Accordingly, the Court concluded with the seemingly narrow holding that “but for §1692f(6), those who engage in only nonjudicial foreclosure proceedings are not debt collectors within the meaning of the Act.”

[1] The FDCPA’s definition of “debt collector” excludes “any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity concerns a debt which was not in default at the time it was obtained by such person.” 15 U.S.C. § 1692a(6)(F)(iii).

[2] “The term ‘debt collector’ means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.”  15 U.S.C. §1692a(6).

[3] Section 1692f(6) prohibits: “[t]aking or threatening to take any nonjudicial action to effect dispossession or disablement of property if—(A) there is no present right to possession of the property claimed as collateral through an enforceable security interest; (B) there is no present intention to take possession of the property; or (C) the property is exempt by law from such dispossession or disablement.”

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Eric Rosenkoetter is based in Maurice Wutscher’s Austin office. For many years, he has focused his practice on various aspects of financial services law. As a litigation attorney, he has conducted every aspect of the litigation process, including countless depositions, motion proceedings, bench and jury trials, and appeals in various courts. In addition, he has significant experience as a compliance and transactional attorney, providing strategic, business growth, legislative, compliance and regulatory advice to national corporations and trade associations. For example, he has drafted consumer contracts and disclosures designed to state-specific statutory requirements, and developed “Best Practices” guides and state-by-state compliance grids, for national financial services companies. He also conducted research and crafted a metrics report for a national trade association with analysis designed to counter the claims of advocacy groups. Eric’s experience also includes working for a national corporation as Executive Counsel, Chief Compliance and Ethics Officer, and Director of Legislative Affairs, and as a federal lobbyist and Director of Government and Public Affairs for a national financial services trade association. In the government sector, Eric presided over approximately 6,000 state administrative hearings, served as a staff attorney for the Missouri Senate, and handled litigation in 33 counties as a regional managing attorney. Eric frequently speaks to audiences on topics relevant to the financial services industry and related advocacy initiatives.

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