The U.S. Supreme Court is currently considering an important question affecting the mortgage industry: whether entities conducting nonjudicial foreclosure proceedings are subject to the requirements of the Fair Debt Collection Practices Act (the “FDCPA”), 15 U.S.C. §§ 1692  et seq.   [1] Whether entities conducting nonjudicial foreclosure proceedings are subject to the requirements of the FDCPA has divided U.S. Circuit Appellate Courts. The Supreme Court’s ruling on this issue could finally provide the mortgage industry and lower courts with guidance as to the proper steps to follow in nonjudicial foreclosure proceedings.

Background . The FDCPA applies to entities or persons that fall under its definition of “debt collector.” Under the FDCPA, a debt collector is any person engaged in any business “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.” [2] Thus, to qualify as a debt collector a person must be collecting a “debt.” The FDCPA generally defines debt as a consumer’s obligation to pay money. [3] These definitions of “debt” and “debt collector” are of paramount importance with respect to whether nonjudicial foreclosures fall within the purview of the FDCPA. Specifically, the courts have inconsistently determined whether nonjudicial foreclosures are attempts at collecting a debt.

Conflicting Circuit Court Decisions . The Supreme Court granted certiorari to review the decision of the Court of Appeals for the Tenth Circuit in  Obduskey v. McCarthy. [4] In  Obduskey , the Tenth Circuit ruled that entities engaged solely in nonjudicial foreclosure proceedings are not debt collectors under the FDCPA and, therefore, not subject to the requirements of the FDCPA. [5] The Tenth Circuit reasoned that the definition of debt in the FDCPA is synonymous with money. [6] It further reasoned that nonjudicial foreclosures are attempts to enforce security interests and not attempts to collect money from a debtor. [7] The Tenth Circuit reached this conclusion by noting that the general rule in nonjudicial foreclosures is that the sale does not preserve to the trustee a right to collect any deficiency in the loan amount against the debtor personally. [8] Therefore, according to the Tenth Circuit, because nonjudicial foreclosures allow the trustee to recover money or proceeds only from the sale of the property and not the debtor personally, it is not an attempt to collect a debt subject to the requirements of the FDCPA. [9] The Tenth Circuit aligned itself with the Ninth Circuit’s decision in  Vien-Phuong Thi Ho v. ReconTrust Co., NA. [10] In  Ho , the Ninth Circuit similarly reasoned and held that a trustee engaged in nonjudicial foreclosure proceedings under California law was not a debt collector subject to the requirements of the FDCPA. [11]

On the other hand, the Fourth and Sixth Circuit Courts of Appeals have ruled that nonjudicial foreclosure proceedings fall under the scope of the FDCPA as attempts to collect a debt. In  Glazer v. Chase Home Finance LLC , [12] the Sixth Circuit found that mortgage foreclosure is an attempt to collect a debt because it reasoned that “every mortgage foreclosure, judicial or otherwise, is undertaken for the very purpose of obtaining payment on the underlying debt, either by persuasion … or compulsion …” [13] The Sixth Circuit aligned itself with the Fourth Circuit’s decision in  Wilson v. Draper & Goldberg, P.L.L.C. [14] In  Wilson , the Fourth Circuit reasoned that the enforcement of a security interest in foreclosure was just one method of collecting the underlying debt and, therefore, it fell under the scope of the FDCPA. [15] Neither the Sixth nor the Fourth Circuit, however, discussed the potential conflict between state law and the FDCPA arising from their interpretation that entities engaged in nonjudicial foreclosure actions are required to also comply with the FDCPA.

Why it Matters . The potential conflict between the FDCPA’s requirements and state nonjudicial foreclosure law creates significant tension between state and federal law. For example, the FDCPA generally prohibits debt collectors from communicating with third parties about the debt absent consent by the debtor. However, state nonjudicial foreclosure law may require the public filing of liens and trustee notices of sale. Further, under certain circumstances, the FDCPA prohibits communications with the debtor. However, many state nonjudicial foreclosure laws have strict requirements for notices that must be sent to the debtor before foreclosure may proceed and do not provide an exception to sending these notices if, for example, the debtor is represented by an attorney. These types of conflicts led the Ninth Circuit to observe that “a trustee could not comply with California law without violating the FDCPA.” [16]

The Supreme Court’s review of the Tenth Circuit’s decision in  Obduskey  is expected to provide lower courts with guidance as to the scope of the FDCPA in the area of mortgage foreclosure law. Importantly, the Supreme Court’s ruling could have a wide-ranging effect on the foreclosure actions that are instituted every day throughout states that have established systems for nonjudicial foreclosures.

[1] Obduskey v. McCarthy & Holthus LLP , 138 S. Ct. 2710 (Mem) (2018).

[2] 15 U.S.C. § 1692a(6).

[3] Id.  at §1692a(5).

[4] 879 F.3d 1216 (10th Cir. 2018).

[5] Id.  at 1221.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] 858 F.3d 568 (9th Cir. 2017).

[11] Id. at 571.

[12] 704 F.3d 453 (6th Cir. 2013).

[13] Id.  at 461.

[14] 443 F.3d 373 (4th Cir. 2006).

[15] Id. at 376 (“We see no reason to make an exception to the [FDCPA] when the debt collector uses foreclosure instead of other methods.”).

[16] Ho , 858 F.3d at 575.

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