Supreme Court Will Decide if Fair Debt Collection Practices Act Should be Applied to Nonjudicial Foreclosure

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The Supreme Court of the United States has agreed to hear a case that may significantly affect how nonjudicial foreclosures are conducted. SCOTUS has granted certiorari to review a lower court decision in a case that asks whether the Fair Debt Collection Practices Act (FDCPA) applies to nonjudicial foreclosure proceedings.

The Supreme Court will review the Tenth Circuit Court of Appeals decision in Obduskey v. McCarthy & Holthus LLP.  In Obduskey, the Tenth Circuit determined that entities solely engaged in the practice of conducting nonjudicial foreclosures do not meet the FDCPA definition of a debt collector, and therefore are not subject to the requirements of the FDCPA.  Circuit courts have issued differing views on the FDCPA’s application to nonjudicial foreclosure proceedings over the years, and a SCOTUS review could finally resolve the question.

The requirements of the FDCPA generally apply to entities or persons that fall under the definition of a “debt collector.”  The FDCPA specifies that a debt collector is someone engaged in a business where “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.”  The FDCPA further defines debt as a consumer’s obligation to pay money.  The crux of the pending decision is whether entities conducting nonjudicial foreclosure proceedings meet the definition of a debt collector, and if a mortgage meets the FDCPA definition of debt.

The Tenth Circuit based their Obduskey decision on the determination that the definition of debt under the FDCPA constitutes the owing of money, whereas a foreclosure is an attempt to recover a security interest and not to collect money from a debtor.  They reached their conclusion that foreclosure is not an attempt to collect a debt based in part on Colorado nonjudicial trustee foreclosure law, where the trustee is allowed to recover the property through foreclosure but cannot recover any money personally from the borrower.

The Tenth Circuit’s decision closely follows an earlier ruling by the Ninth Circuit, which held that a trustee foreclosing on property under California’s nonjudicial foreclosure law is not acting as a debt collector (and thus not subject to the requirements of the FDCPA).

Policy considerations underpinned both the Tenth and Ninth Circuit rulings, as the courts resisted intervening in the states’ authority to regulate real property and promulgate and enforce foreclosure laws. Both courts felt that applying the FDCPA to nonjudicial foreclosures would create “sustained friction between the [FDCPA] and the state [nonjudicial foreclosure] scheme.”  They were therefore reluctant to apply any interpretation of FDCPA regulations that would interfere with state foreclosure laws.

However, in separate cases the Fourth Circuit and Six Circuit have ruled that nonjudicial foreclosures do fall under the restrictions of the FDCPA in collecting a debt.  In Glazer v. Chase Home Finance LLC, the Sixth Circuit concluded that a mortgage foreclosure is an attempt to collect a debt because “every mortgage foreclosure, judicial or otherwise, is undertaken for the very purpose of obtaining payment on the underlying debt, either by persuasion … or compulsion ….”

The Fourth Circuit in Wilson v. Draper & Goldberg, P.L.L.C. reasoned that the enforcement of a security interest in a foreclosure was merely a method to collect a debt, therefore falling under the scope of the FDCPA.  The court felt that failing to associate the rules of the FDCPA with foreclosure, be it judicial or nonjudicial, 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,” with foreclosure being the chosen method to recover the debt.

The decisions from the Ninth and Tenth Circuits noted the potential conflict between the FDCPA and state nonjudicial foreclosure law, notably where the FDCPA prohibits disclosure of specific information by creditors about a debt or debtor.  State nonjudicial foreclosure laws generally require the public posting of documents and notices related to the proceedings.  The state-mandated pre-foreclosure and foreclosure notification requirements would violate the FDCPA.  The courts reasoned that, if entities were defined as a debt collector under the FDCPA a trustee could not comply with state foreclosure laws without violating the rules of the FDCPA.

As a California foreclosure trustee, we are closely monitoring the SCOTUS review of the Obduskey case, as it should provide lower courts with more precise guidance as to the separation between federal debt collection laws, such as the FDCPA, and state foreclosure laws and regulations.  The court’s decision could change the way California and other states enforce nonjudicial foreclosure law and how attorneys conduct foreclosure proceedings on behalf of lenders.

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