SCOTUS Rules Foreclosure Firms Are Not “Debt Collectors” in Nonjudicial Proceedings

This week, in a unanimous decision, the Supreme Court held that law firms conducting nonjudicial foreclosures are not “debt collectors” under the Fair Debt Collection Practices Act.

McCarthy & Holthus LLP (McCarthy) sent the petitioner, Dennis Obduskey, correspondence regarding the foreclosure of his Colorado home in 2014, about five years after he defaulted. Obduskey responded with a letter invoking the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §1692g(b), which provides that if a consumer disputes the amount of a debt, a “debt collector” must “cease collection” until it “obtains verification of the debt” and mails a copy to the debtor. When McCarthy initiated a nonjudicial foreclosure action, Obduskey sued, alleging that McCarthy failed to comply with the FDCPA’s verification procedure. The District Court dismissed on the ground that McCarthy was not a “debt collector” within the meaning of the FDCPA, and the 10th Circuit and Supreme Court affirmed.

The FDCPA regulates “debt collector[s]” as that term is defined in 15 U.S.C. §1692a(6), which means “any person . . . in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts.” But section 1692a(6) also provides a limited-purpose definition, which states that “[f]or the purpose of section 1692f(6) . . . [the] term [debt collector] also includes any person . . . in any business the principal purpose of which is the enforcement of security interests.”

Section 1692f(6) provides that it is an unfair or unconscionable practice to take or threaten to take nonjudicial action to effect dispossession of property under certain circumstances. In Obduskey, the Court held that the specific prohibitions contained in section 1692f(6) apply to McCarthy’s security interest enforcement, which includes nonjudicial foreclosure (a process by which the sale of a secured interest happens outside of court supervision, and the creditor is unable to hold a homeowner liable for the balance). But because McCarthy’s security enforcement activity did not fall within section 1692a(6)’s primary definition of “debt collector,” the Act’s other provisions—including debt verification—did not apply to the firm in the Obduskey dispute.

This decision should provide some relief to lenders and the foreclosure law firms who assist them, provided they comply with federal and state law prohibitions on unfair, deceptive, and abusive practices.