Supreme Court Weighs Application of FDCPA to Non-Judicial Foreclosures
By Mark E. Rooney
January 28, 2019
Mark E. Rooney is Principal and Founder of The Rooney Firm PLLC. He represents banks and mortgage servicers in litigation and compliance matters primarily relating to the FDCPA, TCPA and FCRA. He is a member of MBA and the co-chair of the American Bar Association's subcommittee on FDCPA and TCPA litigation.
Last week the Supreme Court heard oral argument in Obduskey v. McCarthy & Holthus LLP, a case examining whether the Fair Debt Collection Practices Act applies to non-judicial foreclosures. Courts are currently split on the issue, leaving mortgage servicers susceptible to FDCPA liability in connection with non-judicial foreclosures in some parts of the country but not in others.
The eventual decision should bring some nationwide clarity to the issue and ultimately could have broad consequences for mortgage servicers and their law firm agents who effect foreclosures.
The FDCPA regulates all aspects of debt collection and imposes liability on debt collectors for unfair practices, false or misleading statements and harassing or abusive tactics. The statute is replete with nuanced (and unintuitive) definitions, many of which are directly implicated in the Obduskey case. Under the statute, a "debt" is "any obligation ... of a consumer to pay money." The law applies to "debt collectors"--primarily defined as businesses whose principal purpose is the collection of debts or who regularly collect, directly or indirectly, debts owed or due another.
Mortgage servicers are considered debt collectors for purposes of the Act, with two major exceptions. First, the Act does not apply to loans a servicer owns. Second, the Act does not apply to loans that were not in default at the time they were obtained.
The FDCPA also includes an additional limited-purpose definition of a debt collector. For the purpose of a provision governing "any nonjudicial action to effect dispossession or disablement of property" in limited situations (which is not at issue in the Obduskey case) a debt collector is defined to include any business "the principal purpose of which is the enforcement of security interests." This separate, limited-purpose definition strongly suggests that Congress viewed the enforcement of security interests as outside the primary definition of a debt collector--although the interplay of these definitional components of the law is precisely what the Supreme Court is now weighing.
The case began in 2015 in Colorado where the plaintiff, Dennis Obduskey, sued the law firm hired by his mortgage servicer to commence a non-judicial foreclosure after prolonged default. The law firm sent Obduskey various notices and disclosures, some of which are required under Colorado's foreclosure laws, and some of which are typically provided by debt collectors to comply with FDCPA notice provisions (for example, one notice to Obduskey stated that the law firm "may be considered a debt collector attempting to collect a debt" and that "any information obtained will be used for that purpose").
In response to these notices, Obduskey disputed the debt with the law firm, apparently invoking the FDCPA provision that gives consumers an opportunity to validate the debt. When the law firm did not respond, and instead moved ahead with the non-judicial foreclosure process, Obduskey sued. He seeks to hold the law firm responsible for alleged violations of a variety of FDCPA provisions including those governing the debt validation process, communicating with third parties, harassing or abusive tactics, false or misleading representations and unfair practices. The trial court dismissed Obduskey's complaint and held that the enforcement of a security interest through a non-judicial foreclosure process does not constitute debt collection under the statute because the law firm did not attempt "to obtain payment on a debt."
Obduskey appealed to the Circuit Court of Appeals for the Tenth Circuit (encompassing Colorado, Wyoming, Utah, Kansas, New Mexico and Oklahoma) which affirmed the lower court's dismissal. On June 28, 2018, the Supreme Court agreed to hear Obduskey's final appeal.
Obduskey argues that non-judicial foreclosures constitute debt collection because foreclosure notices--an integral part of the foreclosure process--essentially demand payment on the debt from consumers. In its brief before the high court, Obduskey argued that "pre-foreclosure notices declare a default, provide information on how to cure that default, and lay out the devastating consequences of failing to pay--losing one's home." He argues that even without expressly saying so, "the notices serve as an obvious demand for payment" and therefore amount to debt collection.
Alternatively, Obduskey argues that the foreclosure process as a whole constitutes an "indirect" attempt to collect a debt under the statute because the "entire point of the foreclosure is to liquidate the asset and pay the underlying debt."
While Obduskey himself lost in the lower courts, he points out that at least three federal circuit courts of appeals have held that non-judicial foreclosure activity may trigger broad FDCPA liability. (Those are the Fourth Circuit (covering Maryland, Virginia, West Virginia, North Carolina and South Carolina), the Fifth Circuit (Texas, Louisiana, and Mississippi) and the Sixth Circuit (Michigan, Ohio, Kentucky and Tennessee).)
However, as the mortgage servicer's law firm points out, a debt under the statute, by definition, must relate to the payment of money, which is not implicated in a non-judicial foreclosure. (Judicial foreclosures, conversely, are generally viewed as being subject to the FDCPA because creditors are typically able to obtain deficiency judgments--money--in addition to the security interest through the judicial foreclosure process.) The law firm further stresses that, taken together, the statute's primary definition of a debt collector and the additional limited-purpose definition of a debt collector with respect to security interests, evince Congress's intent to treat security enforcers differently. The limited-purpose definition would serve no purpose if security enforcers were considered part of the general definition of a debt collector. The law firm asks the high court to affirm the lower courts' dismissal of the case and notes that the Ninth Circuit (encompassing California, Arizona, Nevada, Oregon, Washington, Idaho and Montana) also has concluded that non-judicial foreclosures do not implicate the general definition of debt collection under the FDCPA.
The Mortgage Bankers Association, joined by other business associations, filed a "friend of the court" brief to highlight some of the mortgage industry's chief concerns. Among other things, MBA pointed out that injecting the FDCPA's notice requirements and other formalities into the foreclosure process would erode the existing, robust set of state and federal consumer protections specifically designed to help consumers avoid foreclosure. MBA demonstrated that, at worst, complying with both the FDCPA and existing foreclosure regulations would be impossible; at best, it would be confusing and expensive, raising servicers' operating costs and making it more expensive for consumers to obtain loans.
Importantly, the federal Consumer Financial Protection Bureau filed a separate brief in support of the servicer's law firm. The CFPB argued that initiating non-judicial foreclosures does not fall within the ambit of debt collection activity under the FDCPA. The CFPB appealed to the "text and structure" of the law and argued for a bright line rule exempting the enforcement of security interests from the FDCPA (except with respect to the narrow provision implicated by the limited-purpose definition, which is not at issue here). The CFPB's stance is consistent with its pledge under then-Director Mick Mulvaney not to "push the envelope" in interpreting consumer protection statutes but instead to hue more closely to the plain terms of the law.
At oral argument, the justices struggled to make sense of the different statutory provisions. Justices Gorsuch, Breyer, Kagan, Kavanagh and Alito all sharply questioned Obduskey's counsel on the relationship between the limited-purpose definition of a debt collector (relating to the enforcement of security interests) and the scope of the substantive provision of the Act to which it applies.
Counsel for the foreclosure law firm stressed that the notices sent to a consumer--incidental to the initiation of a non-judicial foreclosure--are required by state law, contain no demand for payment, and therefore should not be construed as debt collection activity. Justice Kagan seemed unconvinced, stating that "the whole point of getting the security interest in the first place is so that the creditor has leverage in order to pressure the debtor to pay his debt." Justice Kavanaugh also appeared to align with Obduskey's argument when he suggested that a foreclosure notice may "inherently communicat[e] a message that you need to repay the debt or you're going to lose the house."
The Forthcoming Decision
Predicting what, exactly, the Supreme Court will do is a risky proposition. In this case, it is important to note that Obduskey's lawsuit never advanced beyond the very early pleading stage. Both the trial court and the lower appeals court determined that the allegations relating to the non-judicial foreclosure process could in no way amount to a viable FDCPA claim. An affirmance by the Supreme Court would be legally justified under the natural reading (and conventional understanding) of "debt collection" under the statute. It would also yield a better, more practical result for both consumers and mortgage businesses and professionals who are already subjected to an array of foreclosure regulations.
Nonetheless, the high court may be reluctant to impose a bright line rule shielding all security enforcement machinations from FDCPA liability. As Chief Justice Roberts commented during the oral argument: "Banks don't want to own houses. They want to be paid." The implication--that the foreclosure process is unavoidably imbued with debt collection--suggests that the court may find a way to impose general FDCPA liability in the non-judicial foreclosure context, perhaps by instructing lower courts to engage in a fact-specific inquiry focused on whether the actions of a servicer (or its agent) could fairly be viewed as demanding the payment of money. The relationship between federal and state law will be another key consideration. The court, mindful of the states' traditional role in matters affecting real property, will likely avoid any interpretation of the FDCPA that runs roughshod over the many state law protections accorded to consumers facing foreclosure.
Finally, it bears repeating that the case will not affect the two main exceptions to FDCPA liability for mortgage servicers (for loans that are obtained before default or owned). But where the law does apply to the loan, the Supreme Court's decision in the Obduskey case could set a new, nationwide standard for FDCPA liability for mortgage servicers and their law firm partners and will require close scrutiny. The decision is expected before July.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)