Glazer v. Chase Home Finance LLC, et al., 2013 WL 141699 (6th Cir., Jan. 14, 2013)
The plaintiff sued the mortgage servicing company and the law firm it hired to foreclose on the plaintiff’s property, alleging violations of the Fair Debt Collection Practices Act. The Court of Appeals for the Sixth Circuit rejected the law firm’s argument that it was simply enforcing a lien and thus not a "debt collector" under the Act. The court held that the only purpose of enforcing a lien is to obtain payment, i.e., to collect a debt, and therefore "mortgage foreclosure is debt collection under the Act."
The property at issue was the subject of a mortgage and note executed by the preceding property owner. The original lender assigned the note and mortgage to FNMA, but continued to service the loan. Servicing rights were ultimately assigned to Chase Home Finance and, at the time of the assignment, the loan was current. Three months later, the property owner died, and within four months thereafter the loan was in default. Chase hired a law firm to foreclose on the property. A foreclosure action was filed in state court on Chase’s behalf, in which the law firm represented that Chase owned the note. By this time, the plaintiff, Glazer, inherited the property, and asserted defenses against the foreclosure action, including that FNMA, not Chase, owned the note.
After the foreclosure action was voluntarily dismissed by Chase, Glazer filed suit against Chase and the law firm in federal court, alleging that the defendants violated the Act and Ohio law by falsely stating that Chase owned the note and mortgage, improperly scheduling a foreclosure sale and refusing to verify the debt upon request. The district court granted the defendants’ motion to dismiss, and Glazer appealed.
The provisions of the Act at issue in this case apply only to "debt collectors," and, therefore, the central issue in this case was whether Chase and/or the law firm are "debt collectors" pursuant to the Act.
Although the Act defines the term "debt collector," the definition is subject to several exceptions. Pertinent to Chase, the term "debt collector" does not include any person attempting to collect any debt owed or due another to the extent that the debt was not in default at the time it was obtained by such person. Because the debt was not in default when Chase obtained servicing rights, the court held that Chase is not a "debt collector" within the meaning of the Act. In so holding, the court rejected the two arguments made by the plaintiff: (i) that the exception applies only to mortgage servicers who own the debt they service and (ii) that the exception does not apply to sub-servicers like Chase. In rejecting these arguments, the court relied on the language of the exception, which plainly excludes an entity that collects a debt "owed or due another" from the definition of a debt collector, and does not differentiate between servicers and sub-servicers. Fundamentally, the court believed Chase to be collecting a "debt owed another" that was current at the time Chase began servicing the debt. Thus, the court held that Chase fit squarely into the exception of the definition of "debt collector."
The court affirmed the dismissal with respect to Chase, but reached a different conclusion with respect to the law firm.
Because the loan was in default when the law firm became involved, the law firm does not fit within the exception to the definition of "debt collector." Therefore, the court was presented with the issue of whether a mortgage foreclosure action constitutes debt collection under the Act. Unhelpfully, the Act "speaks in terms of debt collection," but does not actually define "debt collection." As this was an issue of first impression within the Sixth Circuit, the court began noting that the majority view adopted in other jurisdictions holds that mortgage foreclosure is not debt collection. The majority view is premised upon the notion that "enforcement of a security interest, which is precisely what mortgage foreclosure is, is not debt collection."
The court began its analysis with the statutory language. "Debt" is defined in the Act to include "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes." This definition, the court noted, focuses on the underlying transaction, which "indicates that whether an obligation is a ‘debt’ depends not on whether the obligation is secured, but rather upon the purpose for which it was incurred." Accordingly, the court concluded that "a home loan is a ‘debt’ even if it is secured."
Next, the court analyzed the scope of the Act, and emphasized that the Act’s use of "broad words," such as "communication," "conduct," and "means" (in addressing how debt collection is performed) is an indication that the statutory language creates a "broad view of what the Act considers collection."
Furthering its analysis of the statutory text, the court noted that the Act does not specifically "exclude from its reach foreclosure or the enforcement of security interests generally." Instead, section 1692i of the Act specifically references actions "to enforce an interest in real property securing the consumer’s obligation," and addresses the proper venue of such actions. Because section 1692i applies only to "debt collectors" as defined in a section that does speak in terms of debt collection, the court reasoned that "filing any type of mortgage foreclosure action, even one not seeking a money judgment on the unpaid debt, is debt collection under the Act." (Emphasis in opinion.)
The court found that its conclusion that mortgage foreclosure actions constitute debt collection pursuant to the Act is supported by decisions from the Third and Fourth Circuits. Finding the reasoning of the Third and Fourth Circuit opinions to be persuasive, the court rejected the rationale of contrary outcomes.
The court therefore held by instituting a foreclosure action, the law firm was engaged in debt collection, and was therefore subject to the provisions of the Act. Accordingly, the court reversed and remanded to the district court.
Entities engaging in mortgage foreclosure activities must be aware that, depending on the location of the property, the foreclosure may be subject to the provisions of the Act. If the property is located within the bounds of the Third, Fourth and Sixth Circuits (Delaware, Kentucky, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, West Virginia, and Virginia), entities engaging in mortgage foreclosure activities should comply with the provisions of the Act.