Consumer Finance Insights
April 23, 2019

Supreme Court Rules That FDCPA Does Not Apply to Nonjudicial Foreclosure Proceedings

On March 20, 2019, in the case of Obduskey v. McCarthy & Holthus LLP, the Supreme Court ruled that the Fair Debt Collection Practices Act (FDCPA) does not apply to entities that conduct non-judicial foreclosure sales.  In so holding, the Court zeroed in on the FDCPA’s definition of “debt collector,” which states that, for the purpose of a separate provision of the FDCPA (15 U.S.C. § 1692f(6)), the “term [debt collector] also includes any person . . . in any business the principal purpose of which is the enforcement of security interests.”  (Emphasis added).  The Court held that the qualification of “debt collector” effectively exempts those who primarily seek to enforce foreclosure interests from the majority of the FDCPA’s provisions.

The case concerned non-judicial foreclosure proceedings commenced by McCarthy & Holthus, LLP (“McCarthy”) on behalf of Wells Fargo.  As part of the process McCarthy sent the plaintiff a notice that it was “instructed to commence foreclosure” against the property, to which the plaintiff responded with a letter stating that she disputed the debt pursuant to the FDCPA.  The FDCPA (15 U.S.C. § 1692g(b)) requires that, upon receipt of a letter disputing a debt, a “debt collector” must “cease collection” until it “obtains verification of the debt” and mails a copy to the debtor.  Instead of doing any of those things, McCarthy pressed forward with nonjudicial foreclosure, prompting the plaintiff to file an action in the District of Colorado to halt the sale alleging that McCarthy violated the FDCPA.  The district court dismissed the case, finding that McCarthy was not a “debt collector” within the meaning of the FDCPA, and the Tenth Circuit affirmed on the same grounds.  The Supreme Court granted certiorari on June 28, 2018.

The FDCPA, in 15 U.S.C. § 1692a, defines “debt” and “debt collector” very broadly—“debt” is “any obligation or alleged obligation of a consumer to pay money . . .” while “debt collector” “means any person . . . in any business the principal purpose of which is the collection of any debts . . . owed or asserted to be owed or due another.”  Given the breath of the definition, the Supreme Court concluded that, absent qualification, the enforcement of a security instrument—the purpose of which is to sell the secured property to recover the underlying debt—is debt collection.  However, the FDCPA, in 15 U.S.C. § 1692a(6), does qualify the definition in the context of enforcing security instruments, providing that, “[f]or the purpose of section [15 U.S.C. §] 1692f(6) [the] term [debt collector] also includes any person . . . in any business the principal purpose of which is the enforcement of security interests.”  (Emphasis added).  15 U.S.C. § 1692f(6), in turn, provides certain specific prohibitions against threatening to take extra-judicial actions to enforce security interests (e.g. where the debt collector has no present right to the take possession of the property at the time the threat is made).  The Court decided that the reference to security interests in § 1692a(6) means that those who seek to enforce security interests are only covered by the FDCPA to the extent that 15 U.S.C. § 1692f(6) applies to their conduct—which did not apply to the facts at issue in this case.

The Court based its decision on three grounds.  First, as a matter of pure statutory construction, the addition of the language regarding security holders in 15 U.S.C. § 1692a(6)—Congress’s use of the word “also” in particular created a “limited-purpose definition,” meaning that those who enforce security interests fall outside the general definition of debt collector.  The definition must be interpreted that way because “[o]therwise why add this sentence at all?”  Second, the Court reasoned that Congress may have intentionally chosen to treat security interests differently.  As an example, the Court cited to state law requirements that secured lenders publish notices of sale—designed to protect borrowers by including notice provisions to ensure that foreclosed properties are sold for the highest value possible—which might run afoul of the FDCPA.  Third, the Court reviewed the FDCPA’s legislative history, and found that Congress actively debated whether to include enforcement of security interests.  In one version of the bill, Congress specifically excluded enforcement of security interests from the definition of “debt collector,” but in another version, Congress specifically included enforcement of security interests in the definition.  The Court reasoned that Congress’s ultimate decision to include the “limited-purpose definition” of enforcement of security interests reflected a compromise, designed to subject those who enforce security interests to the provisions of the FDCPA only in the limited circumstances spelled out in 15 U.S.C. § 1692f(6).

The Obduskey decision clarifies that the FDCPA does not apply to non-judicial foreclosure sales, which should bring some comfort to mortgage loan servicers and foreclosure firms.  However, in considering one of the plaintiff’s arguments, the Court also made it clear that its decision does not necessarily apply to judicial foreclosure sales.  The plaintiff argued that the FDCPA clearly applies to judicial foreclosure sales (and, by extension must also apply to non-judicial foreclosure sales—an argument that the Court rejected) because its venue provision (15 U.S.C. § 1692a(6)) clearly states that “[a]ny debt collector” who brings “an action to enforce an interest in real property securing the consumer’s obligation” must bring the action in the jurisdiction where the property is located.  The Court refused to consider that argument, given that the facts of the case only required the Court to decide the FDCA’s applicability to non-judicial foreclosure sales, leaving the door open for other courts to address that question.  If and when that question is raised to the Supreme Court, LenderLaw Watch will monitor the case and bring you updates as they become available.

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