Consumer Finance Insights
January 15, 2019

Supreme Court Hears Argument on Future of FDCPA Landscape

The issue of whether the Fair Debt Collection Practices Act (FDCPA) applies to non-judicial foreclosure proceedings is now squarely before the U.S. Supreme Court.  Following oral arguments last week in the case Obduskey v. Wells Fargo, et al., No. 17-1307, the Justices will be tasked with deciding whether non-judicial foreclosures qualify as an attempt to collect a debt, and consequently whether parties bringing non-judicial foreclosure actions qualify as “debt collectors,” subject to the restrictions of the FDCPA.

The case involves Petitioner and Colorado homeowner, Dennis Obduskey, who defaulted on his loan that was being serviced by Wells Fargo.  Following his default, Wells Fargo retained law firm McCarthy & Holmes to pursue foreclosure proceedings.  The firm sent Obduskey a notice required under Colorado law to initiate the foreclosure process.  In bringing his suit, Obduskey claims that he responded to the notice by disputing the amount of the debt, but the law firm never responded to the dispute and instead filed a foreclosure action against him.  Obduskey argues this violated the FDCPA.

During oral argument, the Justices centered their questions on a technical reading of the FDCPA’s text.  In the four decades since the statute’s enactment, questions have mounted, and a split in the circuits has formed, as to whether the FDCPA applies to non-judicial foreclosures.

The circuit split, and the now pending decision from the Supreme Court, boils down to whether non-judicial foreclosure proceedings meet the FDCPA’s standard for the collection of a debt or whether such proceedings fall within the statute’s exclusion of those enforcing a security interest.  Prior to the case being petitioned to the Supreme Court, the Tenth Circuit took the position taken previously by the Ninth Circuit that the FDCPA does not cover non-judicial foreclosure proceedings.  The Tenth Circuit explained that the purpose of non-judicial foreclosures is to enforce a security interest, as opposed to an attempt to collect money from the debtor, since non-judicial foreclosures do “not preserve to the trustee the right to collect any deficiency in the loan amount personally against the mortgagor.”  The court found that policy considerations further enforced such a conclusion, because to hold otherwise would create conflict between the FDCPA and state law regulating non-judicial foreclosures.

On the other hand, the Fourth and Sixth Circuits have taken a different stance, ruling that non-judicial foreclosure proceedings qualify as attempts to collect a debt that fall within the scope of the FDCPA.  These circuit courts reasoned that, in essence, foreclosures are undertaken for the very purpose of obtaining payment on the underlying debt.  Cue the Supreme Court.

The Justices echoed some of these conflicting sentiments in their line of questioning last week, with some Justices even leaning toward unexpected sides of the otherwise expected political aisle.  Although the questions did not provide a clear indication of where the Justices would side in issuing their opinion, the Justices did all seem unified in their ambivalence on how to reckon the FDCPA’s statutory text.  Justice Sotomayor at one point even expressed, “I’ve been having a huge problem with this entire case.”  We will continue to keep you updated on their decision and any resulting impact on the FDCPA landscape.

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