On March 20, 2019, the United States Supreme Court issued a ruling resolving a circuit split concerning the definition of a debt collector under the FDCPA, effectively holding that businesses that are only engaged in enforcing mortgage security interests in non-judicial foreclosure states are not considered debt collectors under the federal statute.

In Obduskey v. McCarthy & Holthus LLP, No. 17-1307, 2019 WL 1264579, (U.S. Mar. 20, 2019), the law firm McCarthy & Holthus LLP, acting as an agent for Wells Fargo Bank, N.A., initiated a non-judicial foreclosure on a Colorado residential property owned by borrower and petitioner Dennis Obduskey. The law firm sent the borrower correspondence related to the foreclosure, which included a default notice with the debt amount. Borrower Obduskey attempted to invoke the FDCPA §1692g(b), which provides that if a consumer disputes the debt amount, a “debt collector” must cease collection” until it “obtains verification of the debt” and mails a copy to the debtor. He subsequently filed a lawsuit in federal court against McCarthy & Holthus LLP claiming a violation of the FDCPA for failure to comply with the verification procedure. The District Court dismissed the case on the basis that the Defendant’s law firm was not a debt collector under the FDCPA, and the Tenth Circuit affirmed on appeal.

The United States Supreme Court unanimously upheld the Tenth Circuit’s ruling, holding that businesses exclusively engaged in enforcing a home mortgage security interest are not debt collectors under the section 1692a(6) of the FDCPA, which states that the “…term [debt collector] also includes any person…in any business the principal purpose of which is enforcement of security interests.”

The Court reached this conclusion for at least the following reasons: (1) the plain text of the FDCPA excludes businesses that only enforce security interests; (2) Congress sought to treat security interest enforcement differently from ordinary debt collection to avoid conflicts with state non-judicial foreclosure schemes; and (3) the FDCPA’s legislative history supports the conclusion that no provisions in the FDCPA apply to security interest enforcers except for §1692f(6), which prohibits general threats of non-judicial action by an entity with no right or intention to take possession of the property. 

The Supreme Court’s decision addresses a circuit split on the issue and ultimately sides with the Ninth and Tenth Circuits, which hold that a trustee engaged in non-judicial foreclosure proceedings under state law is not a debt collector subject to the FDCPA. The rationale is that because the object of the non-judicial foreclosure is to retake and resell the security, not to collect money from the borrower, actions under non-judicial foreclosure laws were not attempts to collect a debt. 

In summary, this ruling gives law firms and lenders greater protection in non-judicial foreclosure states, such as California, Arizona, Colorado, Nevada and Utah, as businesses exclusively enforcing security interests in real property are not considered debt collectors under the FDCPA, and, rather, are barred from threatening non-judicial action if they have no right or intention to take possession of the property. The Supreme Court did note that many state laws require communication with the debtor during the repossession process and Justice Sotomayor noted in her concurring opinion that the majority acknowledged that this ruling does not “‘suggest that pursuing non-judicial foreclosure is a license to engage in abusive debt collection practices like repetitive nighttime phone calls; enforcing a security interest does not grant an actor blanket immunity from the Act.'” In any event, Obduskey brings some clarity to a thorny section of the FDCPA and grants greater protection to lenders and law firms who are exercising their right to enforce their mortgage security instrument