Most practitioners representing banks or other financial services industry clients have seen disclaimers like this: “Pursuant to the Fair Debt Collection Practices Act (or “FDCPA”), this communication is an attempt to collect a debt and any information obtained will be used for that purpose.” Many law firms representing lenders or mortgage servicers include this disclaimer on their website, in outgoing voicemail messages, on emails and in correspondence to borrowers and their attorneys because the firms were considered “debt collectors” under the FDCPA. The U.S. Supreme Court ruled on March 20, 2019, however that such law firms in non-judicial foreclosure actions are not debt collectors.
In Obduskey v. McCarthy and Holthus LLP, Case No. 17-1303 (Mar. 20, 2019), the Court held that a law firm representing a bank in a non-judicial foreclosure proceeding is enforcing a “security interest” not collecting a debt. The case involved an issue of statutory interpretation of 15 U.S.C. § 1692a(6) that defines a “debt collector” as “any person … 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 definition goes on to include any business, “the principal purpose of which is the enforcement of security interests” but for the limited purposes of a separate provision of the Act. The issue the Court decided was whether a business principally involved in “the enforcement of security interests” is not a debt collector.
A lender hired the Colorado law firm of McCarthy & Holthus LLP in 2014 to carry out a non-judicial residential foreclosure. The process allows a mortgage lien holder to enforce a security interest in real property by providing notice to the borrower of a default and then selling the underlying property subject to subsequent court approval. The lender is then allowed to keep the proceeds of the sale to satisfy the debt, but nothing more. A judicial foreclosure on the other hand requires the filing of a foreclosure case and a foreclosure judgment prior to a foreclosure sale. If the sale does not yield enough to pay the debt, the lender may obtain a deficiency judgment for the balance. In either situation, however, most state foreclosure statutes require written notice of default to the borrower and itemization of the amounts owed prior to commencing a foreclosure proceeding.
The issue in Obduskey was whether the law firm’s demand letter informing the borrower of a potential foreclosure action, disclosing the amount outstanding on the loan and identifying the creditor was subject to the provisions of the FDCPA. The Court held the law firm was attempting to enforce a security interest and the letter was merely a procedural antecedent to doing so. The firm was therefore not a debt collector subject to FDCPA.
The case involved a non-judicial foreclosure proceeding. The Court left open the question of whether a law firm representing a lender seeking a deficiency judgment in a judicial foreclosure proceeding to enforce a mortgage lien would fall within the definition of “debt collector.” The federal courts are split on that issue so the Court may have more to say.