FDCPA Fair Debt Collection Practices Act binder on a table.

Currently before the U.S. Supreme Court is whether entities conducting nonjudicial foreclosure proceedings are subject to the requirements of the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692 et seq. (FDCPA).[1] Whether entities conducting nonjudicial foreclosure proceedings are subject to the requirements of the FDCPA has divided the courts for many years. The Supreme Court’s ruling on this issue could finally provide the mortgage industry and lower courts with guidance as to the proper steps to follow in nonjudicial foreclosure proceedings.

By way of background, the FDCPA generally only applies to entities or persons that fall under its definition of “debt collector.” Under the FDCPA, a debt collector is any person engaged in any business “the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect … debts owed or due or asserted to be owed or due another.”[2] Thus, to qualify as a debt collector a person must be collecting a “debt.” The FDCPA generally defines debt as a consumer’s obligation to pay money.[3] At the heart of the issue regarding whether entities engaged in nonjudicial foreclosure proceedings is the FDCPA’s definition of the terms “debt” and “debt collector.” Specifically, whether nonjudicial foreclosures are attempts at collecting a debt.

The Supreme Court granted certiorari to review the decision of the Court of Appeals for the Tenth Circuit in Obduskey v. McCarthy.[4] In Obduskey, the Tenth Circuit ruled that entities engaged solely in nonjudicial foreclosure proceedings are not debt collectors under the FDCPA and, therefore, not subject to the requirements of the FDCPA.[5] The Tenth Circuit reasoned that the definition of debt in the FDCPA is synonymous with money.[6] It further reasoned that nonjudicial foreclosures are attempts to enforce security interests and not attempts to collect money from a debtor.[7] The Tenth Circuit reached this conclusion by noting that the general rule in nonjudicial foreclosures, such as the Colorado nonjudicial trustee foreclosure law at issue in the case, is that the sale does not preserve to the trustee a right to collect any deficiency in the loan amount against the debtor personally.[8] Therefore, according to the Tenth Circuit, because nonjudicial foreclosures allow the trustee to recover money or proceeds only from the sale of the property and not the debtor personally, it is not an attempt to collect a debt subject to the requirements of the FDCPA.[9]

The Tenth Circuit aligned itself with the Ninth Circuit’s decision in Vien-Phuong Thi Ho v. ReconTrust Co., NA.[10] In Ho, the Ninth Circuit held that a trustee engaged in nonjudicial foreclosure proceedings under California law was not a debt collector subject to the requirements of the FDCPA.[11] There, the Ninth Circuit also found that because the “object of a nonjudicial foreclosure is to retake and resell the security, not to collect money from the borrower,” actions under California’s nonjudicial foreclosure law were not attempts to collect a debt.[12]

Underlying the rulings of the Tenth and Ninth Circuits are policy considerations regarding the traditional state power to regulate real property and foreclosures. Both the Tenth and Ninth Circuits in Obduskey and Ho found that interpreting the FDCPA to apply to nonjudicial foreclosures would create “sustained friction between the [FDCPA] and the state [nonjudicial foreclosure] scheme.”[13] Absent a clear and manifest intent by Congress to regulate this traditional area of state regulation, the Tenth and Ninth Circuits were reluctant to apply an interpretation of the FDCPA that would have wide-ranging implications by supplanting the traditional state regulation of foreclosures.

On the other hand, the Fourth and Sixth Circuit Courts of Appeals have ruled that nonjudicial foreclosure proceedings fall under the scope of the FDCPA as attempts to collect a debt. For example, in Glazer v. Chase Home Finance LLC,[14] the Sixth Circuit found that mortgage foreclosure is an attempt to collect a debt because it reasoned that “every mortgage foreclosure, judicial or otherwise, is undertaken for the very purpose of obtaining payment on the underlying debt, either by persuasion … or compulsion … .”[15] Therefore, the Sixth Circuit ruled that mortgage foreclosure actions, whether judicial or otherwise, fall within the purview of the FDCPA as attempts to collect a debt.

The Sixth Circuit aligned itself with the Fourth Circuit’s decision in Wilson v. Draper & Goldberg, P.L.L.C.[16] In Wilson, the Fourth Circuit reasoned that the enforcement of a security interest in foreclosure was just one method of collecting the underlying debt and, therefore, it fell under the scope of the FDCPA.[17] In particular, the Fourth Circuit was concerned that interpreting the FDCPA as not applying to nonjudicial foreclosure actions “would create an enormous loophole in the [FDCPA]” by “immunizing any debt from coverage if that debt happened to be secured by a real property interest” and foreclosure was the chosen method of collection of the underlying debt.[18] Notably, neither the Sixth nor the Fourth Circuit discussed the potential conflict between state law and the FDCPA arising from their interpretation that entities engaged in nonjudicial foreclosure actions are required to also comply with the FDCPA.

As observed by the Tenth and Ninth Circuits, the potential conflict between the FDCPA’s requirements and state nonjudicial foreclosure law creates a significant tension between state and federal law. For example, generally the FDCPA prohibits debt collectors from communicating with third parties about the debt absent consent by the debtor. However, state nonjudicial foreclosure law may require the public filing of liens and trustee notices of sale. Further, under certain circumstances, the FDCPA prohibits communications with the debtor. Yet many state nonjudicial foreclosure laws have strict requirements for notices that must be sent to the debtor before foreclosure may proceed and do not provide an exception to sending these notices if, for example, the debtor is represented by an attorney. These were the kinds of conflicts the Ninth Circuit observed that meant that “a trustee could not comply with California law without violating the FDCPA” – effectively preventing California’s nonjudicial foreclosure system from functioning.[19]

The Supreme Court’s review of the Tenth Circuit’s decision in Obduskey is expected to finally provide lower courts with guidance as to the scope of the FDCPA in the area of mortgage foreclosure law. Importantly, the Supreme Court’s ruling could have a wide-ranging effect on the countless foreclosure actions that are instituted throughout the various states that have established a system for nonjudicial foreclosures.

[1] Obduskey v. McCarthy & Holthus LLP, 138 S. Ct. 2710 (Mem) (2018).

[2] 15 U.S.C. § 1692a(6).

[3] Id. at §1692a(5).

[4] 879 F.3d 1216 (10th Cir. 2018).

[5] Id. at 1221.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] 858 F.3d 568 (9th Cir. 2017).

[11] Id. at 571.

[12] Id. The Ninth Circuit specifically noted that “actions taken to facilitate a nonjudicial foreclosure, such as sending the notice of default and notice of sale, are not attempts to collect ‘debt’ as that term is defined by the FDCPA.” Id. at 572.

[13] Id. at 576. The Tenth Circuit on its part found that applying the FDCPA to nonjudicial foreclosures in Colorado “would conflict with Colorado mortgage foreclosure law” and that there was no “clear and manifest intention on the part of Congress to supplant state nonjudicial foreclosure law.” Obduskey, 879 F.3d at 1223.

[14] 704 F.3d 453 (6th Cir. 2013).

[15] Id. at 461.

[16] 443 F.3d 373 (4th Cir. 2006).

[17] Id. at 376 (“We see no reason to make an exception to the [FDCPA] when the debt collector uses foreclosure instead of other methods.”).

[18] Id.

[19] Ho, 858 F.3d at 575.