The U.S. Court of Appeals for the Sixth Circuit recently held that mortgage foreclosure actions are "debt collection" under the Fair Debt Collection Practices Act (FDCPA). Glazer v. Chase Home Finance LLC, No. 10-3416, 2013 WL 141699 (6th Cir. Jan. 14, 2013). In Glazer, the Sixth Circuit also held that lawyers who meet the general definition of debt collector under the FDCPA must comply with its provisions when engaged in mortgage foreclosure activities. And a lawyer whose principal business purpose is mortgage foreclosure or who "regularly" performs this function meets this definition.

In Glazer, a property owner sued its mortgage servicer and the law firm it hired to foreclose on property he had inherited, alleging violations of the FDCPA and Ohio law. The complaint alleged that the servicer, its employees, and its law firm violated the FDCPA by falsely stating that the servicer owned the note and mortgage, improperly scheduling the foreclosure sale, and refusing to verify the debt upon request. The trial court granted summary judgment for defendants on the federal claims, reasoning that a mortgage foreclosure is the enforcement of a security interest, not a debt collection, and as such is not subject to the FDCPA.

Sixth Circuit’s Ruling

On appeal, the Sixth Circuit reversed the district court’s ruling that a law firm was not "a debt collector." Relying primarily on decisions of its sister circuits in Wilson v. Draper & Goldberg, PLLC, 443 F.3d 373 (4th Cir. 2005) and Piper v. Portnoff Law Assocs., Ltd., 396 F.3d 227 (3d Cir. 2005), the court concluded that "every mortgage foreclosure, judicial or otherwise, is undertaken for the very purpose of obtaining payment on the underlying debt," and, therefore, every mortgage foreclosure is a debt collection subject to the FDCPA. The court determined that was equally so even when the foreclosure was "not seeking a money judgment on the unpaid debt."

In reaching its decision, the Sixth Circuit rejected the view of the majority of district courts, including the one in this case, that mortgage foreclosures generally are not debt collection under the FDCPA because they are enforcements of a security instrument, not attempts to collect money.

The FDCPA itself distinguishes between debt collectors and security enforcers. The FDCPA defines "debt collector" as one whose "principal business" is debt collection or "who regularly collects or attempts to collect" consumer debts. Section 1692(f)(6) of the FDCPA prohibits "taking or threatening to take any nonjudicial action" to enforce a security interest on property where (a) there is not present right to the collateral, (b) there is no present intent to exercise such rights, or (c) the property is exempt by law. For the purpose of that section only, the FDCPA’s definition of "debt collection" includes parties whose principal business is enforcing security interests.

According to the Sixth Circuit, rather than exclude security enforcement from general debt collection, this provision should be read to extend the scope of this provision to include those whose exclusive role in the collection process is security enforcement, such as repossession firms. The Sixth Circuit thus declined to interpret this provision to exclude security enforcers whose primary purpose is debt collection or who regularly collect debts from the FDCPA.

The Sixth Circuit’s decision in Glazer offers perhaps the most expansive interpretation of "debt collection" in a growing number of circuit opinions, including those in the Fourth, Fifth, and Eleventh Circuits, which are divided over whether persons foreclosing on mortgages are "debt collectors" under the FDCPA. For example, in Wilson, the Fourth Circuit case on which Glazer primarily relies, the defendant also made demands for the payment of money after the foreclosure proceeding began—which is classic debt collection. See also Blagogee v. Equity Trs., LLC, No. 1:10-CV-13 (GBL-IDD), 2010 WL 2933963, at *5-6 (E.D. Va. July 26, 2010) (distinguishing Wilson and finding that the plaintiff did not allege sufficient facts to support an FDCPA claim because the defendant did not expressly demand payment).

Distinctions From Other Cases

Unlike Glazer, Wilson was not a case involving the enforcement of a security instrument without an attempt to collect money. This distinction is illustrated in the different results reached in three Eleventh Circuit cases involving FDCPA claims in the foreclosure context. Most recently, the Eleventh Circuit held that a demand for payment ancillary to a foreclosure proceeding is debt collection under the FDCPA. Reese v. Ellis, Painter, Ratterree & Adams, LLP, 678 F. 3d 1211, 1214 (11th Cir. 2012). Reese did not address whether a security enforcer could be a debt collector under the FDCPA. Rather, the court limited its analysis to a letter sent that contained both a demand for payment of a promissory note and a foreclosure notice. By contrast, in two separate opinions, the Eleventh Circuit has held that mortgage foreclosure is not debt collection covered by the FDCPA on the basis that under the FDCPA, security enforcers are only debt collectors for the purposes of § 1629f(6). The Eleventh Circuit reasoned that the security enforcer clause exempts the enforcement of security interests from being considered "debt collection." See Warren v. Countrywide Home Loans, Inc., 342 F. App’x 458 (11th Cir. 2009); Ausar-El ex rel. Small, Jr. v. BAC (Bank of America) Home Loans Servicing LP, 448 F. App’x 1 (11th Cir. 2011). These decisions are thus squarely at odds with the Sixth Circuit’s rationale and holding in Glazer.

Significance for the Industry

The Sixth Circuit’s ruling is significant because, among other things, the prospect of FDCPA liability may discourage law firms from engaging in mortgage foreclosure activity, requiring banks and other mortgage servicers to move some of these collection activities in-house. The potential consequences of the Sixth Circuit decision may be particularly acute when considered in conjunction with a recent decision in the Ninth Circuit, which makes clear that lawyers and other principals of firms operating as debt collectors for banks might be held personally liable under the FDCPA for the actions of their firms. Cruz v. Int'l Collection Corp., 673 F.3d 991 (9th Cir. 2012).

These heightened legal risks will also come from anticipated scrutiny by the CFPB, as the agency charged with enforcing the FDCPA. The CFPB has indicated that debt collection activity is a priority area for agency examinations and investigations. In addition, the CFPB has stated, pursuant to its authority under § 1027(e) of the Dodd-Frank Act, that lawyers who pursue consumer debts are subject to its enforcement authority. If the law firm grosses more than $10 million of annual revenue, the CFPB has proposed that it also be subject to periodic examinations.

Such legal and regulatory developments may make it infeasible, or at least very unpalatable, for a number of lawyers to continue carrying out mortgage foreclosure activities that might subject them personally or their firm to liability. If banks opt to move some of these functions in-house, they should be aware that they may become subject to FDCPA liability also if they use, for collection activities, a fictitious name or any name other than their own, which a borrower might believe is a debt collector other than the bank itself. See 15 U.S.C. § 1692a(6). Doing so makes a creditor, otherwise exempt from the FDCPA, a "debt collector" under § 1692a(6), and simultaneously violates the FDCPA’s prohibition against deceptive collection practices. § 1692e.