Non-Judicial Foreclosure is Not Debt Collection

The United States Supreme Court Rejects Notion Of Nonjudicial Foreclosures As Debt Collection Activity Under The Fair Debt Collection Practices Act

Is a nonjudicial foreclosure a form of “debt collection” under the Fair Debt Collection Practices Act (“FDCPA”)? The circuit courts are split on the question – the 3rd, 4th, and 6th Circuits have held that nonjudicial foreclosure is debt collection whereas the 9th (which includes California) and 10th circuits have held that nonjudicial foreclosure is not debt collection. Today, the United States Supreme Court issued a unanimous decision holding that a business engaged in no more than nonjudicial foreclosure proceedings is not a “debt collector” under the FDCPA, except for the limited purpose codified under 15 U.S.C. § 1692f(6).

In Obduskey v. McCarthy & Holthus, LLP, McCarthy was hired to carry out a nonjudicial foreclosure on a Colorado home owned by petitioner, Obduskey. In response to correspondence sent from McCarthy to Obduskey related to the foreclosure, Obduskey responded with a letter invoking FDCPA provision 15 U.S.C. § 1692g(b), which requires that a debt collector cease collection activities until verification of the debt is obtained when a consumer disputes the amount of a debt. McCarthy initiated a nonjudicial foreclosure action, precipitating a lawsuit from Obduskey. The District Court dismissed on the ground that McCarthy was not a “debt collector” under the FDCPA, which the Tenth Circuit affirmed.

In reaching its decision, the Court scrutinized both the language and legislative intent of the FDCPA, and, in particular, §§ 1692a(6) and 1692f(6). Central to its decision was a finding by the Court that entities who are engaged in no more than security-interest enforcement do not fall within the FDCPA’s primary definition of a debt collector found in § 1692a(6). Proponents of foreclosure as a form of debt collection have long argued that the definition of § 1692f(6), which includes reference to “security interest enforcement”, should be applied throughout the FDCPA and solely to the limited circumstances codified in § 1692f. The Court resoundingly rejected this argument.

Though premised on a case involving the Colorado nonjudicial foreclosure framework, the Court’s decision has far-reaching implications, including in California. Had the Court considered nonjudicial foreclosure a form of debt collection, it would not only have required those engaged in the business of nonjudicial foreclosure to substantially revamp their policies and procedures to comply with the FDCPA and it’s California equivalent, the Rosenthal Fair Debt Collection Practices Act, but it also would have created conflicts between requirements of the FDCPA/Rosenthal and California’s comprehensive statutory framework governing nonjudicial foreclosures, throwing an entire industry into flux. Instead, the Court has definitively rejected the notion that nonjudicial foreclosures is debt collection activity.

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