Does the Fair Debt Collection Practices Act apply when an attorney, acting on behalf of a creditor, engages in non-judicial foreclosure proceedings that should be treated as debt collection?
This case asks the Supreme Court to decide whether the definition of “debt collection” in the Fair Debt Collection Practices Act (“FDCPA”) includes non-judicial foreclosure proceedings and whether the Act therefore applies to attorneys carrying out non-judicial foreclosures. Respondent McCarthy & Holthus LLP (“McCarthy”) pursued a non-judicial foreclosure of property owned by Petitioner Dennis Obduskey, who defaulted on a loan secured by the property at issue in the foreclosure. Obduskey subsequently filed suit against McCarthy, challenging the foreclosure and citing the FDCPA. The Tenth Circuit held that the FDCPA did not apply because non-judicial foreclosures do not qualify as a debt collection activity and are instead considered the enforcement of a security interest. Obduskey contends that non-judicial foreclosure proceedings are attempts to collect a debt because they demand that the debtor pay by threatening to take away his home and, if foreclosure is completed, liquidate the debt by selling the home. The outcome of this case has significant implications on how protected borrowers are and how much liability attorneys, creditors, and trustees face.
Questions as Framed for the Court by the Parties
Whether the Fair Debt Collection Practices Act applies to non-judicial foreclosure proceedings.
In 2007, Petitioner Dennis Obduskey obtained a loan from Magnus Financial Corporation in the amount of $329,940 to purchase a home in Colorado. Wells Fargo serviced the loan, which was secured by the property. Wells Fargo offered multiple loan modifications between 2008 and 2012 under which Obduskey made several trial payments that were accepted as late payments and other fees. Obduskey defaulted in June 2009, prompting Wells Fargo to begin the first of several non-judicial foreclosure proceedings upon the property. None of the foreclosures were ever completed. On June 30, 2009, Obduskey complained to the Federal Trade Commission (“FTC”) alleging improper conduct by Wells Fargo.
In 2014, Wells Fargo hired Respondent McCarthy & Holthus LLP (“McCarthy”) to execute a non-judicial foreclosure of Obduskey’s property under Colorado state law. McCarthy sent a letter to Obduskey explaining that the law firm “may be considered a debt collector attempting to collect a debt,” and that McCarthy would assume the debt was valid unless Obduskey disputed the validity of the debt within thirty days. Obduskey submitted objections disputing the alleged debt amount to McCarthy. Under Section 1692g of the Fair Debt Collection Practices Act (“FDCPA”), a debt collector is barred from debt collection activities and communications until the debt collector obtains verification of the debt.
Obduskey filed a complaint with the Consumer Financial Protection Bureau (“CFPB”) when McCarthy, without debt verification, began non-judicial foreclosure proceedings in May 2015. Obduskey alleged that McCarthy and Wells Fargo violated the FDCPA because the law firm acted as a debt collector when it prosecuted a non-judicial foreclosure, and therefore violated FDCPA § 1692g by failing to wait for debt verification. In 2016, the district court granted McCarthy’s motion to dismiss the complaint. Noting that not all courts agree, the court held that non-judicial foreclosure is not considered debt collection and that McCarthy’s actions were not subject to the restrictions of FDCPA § 1692g. The fact that McCarthy had informed Obduskey that it would act as a debt collector did not automatically make its actions debt collection activities.
In 2018, the Tenth Circuit affirmed the district court’s dismissal. The Tenth Circuit focused on the fact that non-judicial foreclosures under Colorado state law do not allow the creditor to collect any deficiency, meaning that any debt owed in excess of the value of the repossessed property is not recoverable. According to the Tenth Circuit, the right to a deficiency amount is a distinguishing element required for a debt collection, which meant that McCarthy’s non-judicial foreclosure was merely the enforcement of a security interest. The Tenth Circuit also determined that if the FDCPA applied to non-judicial foreclosure proceedings, it would conflict with Colorado’s foreclosure law. Accordingly, the court decided that unless there is clear Congressional intent, federal law does not supersede the important state interest regulating foreclosures. The Tenth Circuit further explained that the letter sent to Obduskey did not rise to the level of demanding payment, but only provided notification that McCarthy was hired to foreclose on the property. The Tenth Circuit thus held that non-judicial foreclosure under Colorado law did not amount to debt collection and falls outside the scope of the FDCPA.
PLAIN AND ORDINARY MEANING OF THE FDCPA
Obduskey argues that non-judicial foreclosure constitutes debt collection under the that the plain text of the FDCPA. According to Obduskey, non-judicial foreclosure is an attempt to collect a debt and is therefore included within the FDCPA’s definition of a debt collector as a person who “regularly collects or attempts to collect, directly or indirectly, debts owed or due . . . another.” Obduskey contends that foreclosure notices are a direct attempt to collect a debt because they explain that the debtor owes money and will experience the consequence of losing his home if he doesn’t pay. This often has the effect of convincing debtors to pay, which Obduskey argues is an indication that the purpose of the notices is to induce payment. Obduskey also asserts that, in the alternative, foreclosure notices are an indirect attempt to collect a debt when broadly defined as obtaining payment or liquidation of a debt, and argues that foreclosure fits within this definition because it involves selling a house to liquidate the borrower’s debt. Lastly, Obduskey posits that Section 1692a(6) of the FDCPA—which states that “for the purpose of” Section 1692f(6), the phrase “debt collector” “also includes” anyone in the business of “enforc[ing] of security interests”—does not imply that the general definition of “debt collector” (the definition in provisions of the FDCPA other than Section 1692f(6)) excludes all entities that enforce security interests. Obduskey contends that the provision simply means that some entities enforce security interests without falling under the general definition of “debt collector,” and that Congress expanded the definition of “debt collector” in Section 1692f(6) to include these entities. Obduskey concludes that foreclosure notices are still debt-collection efforts even if they also seek to enforce security interests.
McCarthy argues that under the plain text of the FDCPA, non-judicial foreclosure proceedings are not within the definition of debt collection because the FDCPA defines debt as “an obligation or alleged obligation of a consumer to pay money.” McCarthy contends that foreclosure notices do not seek to make a consumer pay money, but instead seek to enforce a security interest by giving the creditor possession of secured property. McCarthy maintains that the FDCPA makes it clear that enforcing a security interest is different than collecting a debt by providing a separate definition of “debt collector” for Section 1692f(6), implying that the definition of “debt collector” in other provisions does not include the enforcement of security interests. McCarthy also claims that the FDCPA codified the common law distinction between the enforcement of security interests and debt collection as it existed when the Act was passed, as indicated by the FDCPA’s consistent use of the verb “collect” when referring to debts and the verb “enforce” when referring to security interests. McCarthy additionally asserts that the FDCPA’s examples of illegal debt collection practices only describe typical debt-collection scenarios, so foreclosure proceedings were not covered. Lastly, McCarthy notes that the FTC interprets the FDCPA as excluding the enforcement of security interests from its definition of “debt collection.”
PURPOSE AND LEGISLATIVE HISTORY OF THE FDCPA
Given that the FDCPA’s purpose was to compensate for the inadequacy of inconsistent state laws by providing baseline protections for debtors, Obduskey asserts, it would make little sense to presume Congress intended to create a loophole excluding debtors from basic protections in the foreclosure context. Obduskey argues that a debtor confronted with foreclosure is especially vulnerable since he faces the potential loss of his home and that excluding foreclosures from the Act would conflict with its protective purpose. According to Obduskey, because the Senate debates on the FDCPA referenced mortgages, which are commonly enforced through foreclosures, the debates likely would have mentioned an exception for non-judicial foreclosures if such an exception were intended to exist.
McCarthy counters that the express purpose of the FDCPA is to protect consumers against unfair debt collection practices, not security enforcement practices, and excluding foreclosures from the Act’s scope does not conflict with its purpose. McCarthy also argues that the references to mortgages in the legislative history do not have any bearing on whether debt collection includes foreclosures because mortgage servicing companies do other things than conduct foreclosure proceedings. McCarthy further maintains that Congress considered and rejected a general definition of “debt collector” including entities that enforce security interests, so the court should not attempt to manufacture such a definition. While Congress acknowledged the lack of debt collection laws in thirteen states as a motivating factor for the FDCPA, McCarthy asserts that every state had foreclosure laws at the time, making it unlikely that Congress intended the FDCPA to cover foreclosures.
Obduskey posits that the Court would not violate federalism principles by interpreting the FDCPA as applying to foreclosures. Obduskey argues that Congress already regulates foreclosures under laws such as the Truth In Lending Act, the Real Estate Settlement Procedures Act, and the Bankruptcy Code, indicating that foreclosures are not a uniquely state concern. According to Obduskey, the FDCPA includes a venue requirement for foreclosure proceedings in Section 1692i(a)(1), and both sides agree that judicial foreclosures fall within the scope of the FDCPA. Obduskey contends that since the FDCPA indisputably interferes with foreclosure proceedings occurring within state courts, it makes little sense to presume that the FDCPA would exempt non-judicial foreclosures simply to avoid interfering with state law. Further, Obduskey claims that Congress intended the FDCPA to preempt less protective state laws and did not provide an exception for non-judicial foreclosures. Obduskey additionally asserts that the application of the FDCPA to foreclosures does not render state systems of regulating foreclosure proceedings inoperable; rather, Section 1692n’s preemption provision shows how federal and state regulation of foreclosures can work together. Obduskey finally contends that states also can—and often will—revise their regulatory schemes to accommodate federal law where conflicts exist.
McCarthy counters that states have an “essential  interest” in regulating foreclosures and have long exercised this interest and that courts should not interpret federal law to interfere with state foreclosure law unless Congress expresses a clear intent to do so. . McCarthy argues that the FDCPA does not express such an intent but instead exemplifies an intent to preserve state law. . McCarthy reasons that the FDCPA protects states by providing that state law “is not annul[led], alter[ed], or affect[ed]” unless it is less protective than the FDCPA. McCarthy finally argues that the application of the FDCPA to foreclosures would interfere with state foreclosure schemes, putting debt collectors in situations where they would have to violate state laws to comply with federal law.
PROTECTION OF BORROWERS
The NAACP Legal Defense & Educational Fund (“NAACP”), in support of Obduskey, argues that Congress intended the FDCPA to classify attorneys that pursue non-judicial foreclosure as debt collectors to prevent abusive practices by debt collectors. Because home foreclosure disproportionally affects African-Americans, the NAACP maintains that the FDCPA should be read to regulate non-judicial foreclosure to provide equal protection for borrowers nationally. According to the NAACP, the FDCPA would provide unequal protection for borrowers if interpreted to apply only in judicial proceedings, but not non-judicial foreclosure. This, in turn, the NAACP posits, would undermine Congressional intent to provide protection for borrowers. The NAACP asserts that federal regulation of non-judicial foreclosures through the FDCPA is necessary to provide protection to borrowers who are more vulnerable to the abuses of non-judicial foreclosure as compared to judicial foreclosure, where creditors have to file court documentation.
Legal League 100 (“Legal League”), in support of McCarthy, argues that the Tenth Circuit should be upheld because federal regulation of non-judicial foreclosures would upset the delicate balance of rights and interests struck by each individual state’s own statutory scheme governing the local foreclosure process. According to Legal League, if the FDCPA applied to non-judicial foreclosure, the FDCPA would undermine three important functions that non-judicial foreclosures notices serve for borrowers and the public: giving the borrower notice of foreclosure, allowing third-parties to protect their interest in the property, and allowing third-parties to bid on the property during the auction. Legal League also contends that the Court should find that the FDCPA does not apply to non-judicial proceedings because attorneys would be liable when engaged in foreclosure and States would have to modify their foreclosure laws. The Mortgage Bankers Association and five trade associations (“Associations”), in support of McCarthy, claim that applying the FDCPA regulations on existing non-judicial foreclosure laws would burden lenders and increase cost for borrowers. The Associations argue that the FDCPA would harm lenders and borrowers because regulation would incur compliance costs upon lenders that is passed to borrowers and make the foreclosure process longer and inhibit lenders to seek immediate relief in case of default.
LIABILITY UNDER THE FDCPA
The National Consumer Law Center (“NCLC”), in support of Obduskey, contends that the Court should hold mortgage servicers and attorneys accountable because they make the foreclosure process costly to both borrowers and creditors through excess complexity and fees. Mortgage servicers, along with attorneys that act on their behalf, the NCLC asserts, have an incentive to benefit from foreclosure that the Court should rectify in order to align with the interests of borrowers. For instance, the NCLC notes that mortgage servicers routinely mismanage loan modifications that have produced additional foreclosure losses upon borrowers and courts having to expense resources to correct these abuses. The NCLC proposes that the Court should adopt a widespread application of the FDCPA that would provide more reliable information regarding the borrower’s mortgage and reduce the number of unnecessary foreclosures due to unfair practices, making mortgages servicers and their attorneys liable.
The National Creditors Bar Association (“NCBA”), in support of McCarthy, contends that, unless clearly expressed by Congress, the FDCPA should not supersede state law. The NCBA warns, attorneys that pursue foreclosure for the benefit of their creditor clients would face a difficult choice: they can either comply with state law and zealously represent their clients, but risk violating the FDCPA, or follow the FDCPA and violate state law, harming their clients’ interests for not pursuing foreclosure. The United Trustees Association and two California mortgage associations (“UTA”), in support of McCarthy, conclude that expanding the FDCPA would create unnecessary confusion, since there are existing state laws to protect borrowers. The UTA notes that in California, the state legislature has expressed that trustees are not debt collectors under the FDCPA. The UTA reasons that if California trustees are designated as debt collectors, the FDCPA would bar trustees from communicating with debtors, creating a direct conflict with mandatory state laws.
- Evan Weinberger, Supreme Court Could Kill Some Foreclosure Collection Lawsuits, Bloomberg BNA (June 28, 2018).
- Greg Stohr, Debt-Collection Dispute Gets U.S. Supreme Court Review, Bloomberg (June 28, 2018).
- Locke Lord LLP, “Debt Collector” Or “Enforcer of Security Interest” – That Is The Question; Supreme Court To Answer Next Term, JD Supra (July 6, 2018).