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. 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 Supreme Court first looked to the language of the FDCPA which provides a “general” definition for “debt collector.” However, that subsection also provides: “For the purpose of section 808(6) [15 U.S.C. § 1692f(6)], 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.”