Fair Debt Collection Claims in Foreclosure Cases

The Fair Debt Collection Practices Act (FDCPA) (15 U.S.C. §§ 1692 and following) is a federal law that protects consumers from abusive debt collectors.

The purpose of the FDCPA is to:

• eliminate abusive debt collection practices
• establish guidelines under which debt collectors may conduct business, and
• provide consumers with the means to dispute and validate the accuracy of a debt.

The FDCPA is usually used to fight the abusive tactics of aggressive debt collection agencies. But homeowners in foreclosure sometimes bring FDCPA claims to fight the action.

What Is a "Debt Collector" Under the FDCPA?

Generally, a "debt collector" under the FDCPA is someone who regularly collects debts owed to others, including collection agencies and attorneys who collect debts regularly (see Heintz v. Jenkins, 115 S.Ct. 1489 (1995)), or whose main business is collecting debts, including debt buyers, in some instances. Usually, original creditors are excluded.

So, the term "debt collector" generally includes debt collection agencies, collection attorneys, and debt buyers. The FDCPA applies to mortgage servicers only if they obtained the loan servicing rights after the borrower was in default. A loan servicer that gets the servicing rights on a debt before the borrower's default isn't covered by the FDCPA. (15 U.S.C. § 1692a(1)(F)).

What Actions Are Illegal Under the FDCPA?

The FDCPA prohibits certain types of abusive and deceptive conduct when attempting to collect a debt, such as:

• failing to cease communication after receiving written notice that the consumer wishes no further communication
• contacting a consumer known to be represented by an attorney
• continuing to try to collect on a debt after the debt collector receives a consumer's written request to verify the existence and amount of the debt and before providing the verification (the consumer must make the request within a 30-day validation period)
• seeking unjustified amounts, which includes demanding any amounts not authorized by the agreement creating the debt or permitted by law, and
• reporting false information on a consumer's credit report.

Court Split On Whether the FDCPA Applies to Foreclosures

Historically, courts have been split on whether the FDCPA extends to firms conducting foreclosures.

Courts That Apply the FDCPA to Foreclosures

Courts in some jurisdictions have held that an attorney or any other person or entity who pursues foreclosure on behalf of the creditor and who also demands payment or otherwise attempts to collect the debt, like by seeking a deficiency, is a covered debt collector and is subject to the FDCPA.

So, courts sometimes view judicial foreclosures as subject to the FDCPA because creditors can generally get deficiency judgments (money) in addition to foreclosing the security interest.

Courts That Have Said the FDCPA Does Not Apply to Foreclosures

Other courts have found that the FDCPA doesn't cover foreclosure activity. This view is based on the premise that mortgage foreclosure involves the enforcement of security interests, which isn't necessarily the same as collecting a debt.

On March 20, 2019, the U.S. Supreme Court unanimously decided that the FDCPA doesn't broadly apply to firms pursuing nonjudicial foreclosures. (See Obduskey v. McCarthy & Holthus, LLP​, No. 17-1307 (March 20, 2019)). The Obduskey case held that a business engaged in no more than nonjudicial foreclosure proceedings is not a debt collector, except for the limited purpose of a particular FDCPA section (15 U.S.C. § 1692f(6)), which generally prohibits taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if the debt collector has no present right or intention to do so.

Concerning judicial foreclosures, the Court said, "whether those who judicially enforce mortgages fall within the scope of the primary definition [of a debt collector] is a question we can leave for another day." But based on the holding in this case, there's a strong argument that the FDCPA wouldn't apply to firms handling judicial foreclosures that result in only in rem judgments (judgments against the property) without an in personam deficiency judgment.

Following this line of reasoning, on June 20, 2020, the U.S. Court of Appeals for the Ninth Circuit in Barnes v. Routh Crabtree Olson, P.C. held that a judicial foreclosure proceeding is not a form of debt collection when the proceeding doesn't include a request for a deficiency judgment.

Required Notice When the FDCPA Applies

If the FDCPA is applicable, the foreclosing party must comply with the law's notice requirements and restrictions. This means the firm, if it qualifies as a debt collector, must send a timely letter within five days of its first communication with the debtor containing:

• the amount of the debt
• the name of the creditor to whom the debt is owed
• a statement that unless the consumer, within 30 days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector
• a statement that if the consumer notifies the debt collector in writing within the 30-day period that the debt, or any portion of the debt, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and will a copy of such verification or judgment to the consumer, and
• a statement that, upon the consumer's written request within the 30-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.

What this means for homeowners facing foreclosure is that if the FDCPA applies, you have the right to dispute the debt and ask for a verification of the existence and amount of the outstanding indebtedness. Just be sure to do so within 30 days after receiving the notice. If any amounts not permitted under the mortgage contract or applicable law are included in the outstanding indebtedness, that's a violation of the FDCPA. If they never send you the notice, that's a violation too.

Also, if you dispute the debt, the debt collector must cease its attempts to collect the debt or the disputed portion of the debt until it mails verification of the debt to you.

FDCPA Protects Homeowners from Illegal Collection of Zombie Mortgages

Leading up to the foreclosure crisis, many lenders offered "piggyback" or "80/20" mortgages. With an 80/20 mortgage setup, a first mortgage covered 80% of the purchase price, and a second mortgage covered the remaining 20%.

Lenders often didn't pursue homeowners for payment on these second mortgages when the borrowers defaulted. Instead, they charged off the defaulted loans and sold them loans to debt collectors, usually for pennies on the dollar.

What Is a Zombie Mortgage?

During the foreclosure crisis, many homeowners with these piggyback loans faced foreclosure but were able to save their properties by modifying the first mortgage or taking some other action, such as filing for bankruptcy. The second mortgages were basically forgotten. The homeowner assumed the loan was paid off as part of or included in the modification, discharged in bankruptcy, or forgiven.

However, years later, and often without any notices or periodic statements from the loan owners in the interim, these second mortgage holders (again, usually debt collectors) began demanding the mortgage balances, plus years of interest and fees, and threatening foreclosures if homeowners didn't pay.

These mortgages are called "silent second mortgages" or "zombie mortgages." If a debt collector contacts you about a mortgage you haven't heard about in years, you might have a zombie mortgage.

Threatening to Sue to Collect a Time-Barred Zombie Mortgage Debt Is Illegal

Because of the amount of elapsed time on zombie mortgage loans, some are likely time-barred under state law. (A "time-barred" debt has an expired statute of limitations.)

On April 26, 2023, the Consumer Financial Protection Bureau (CFPB) issued an advisory opinion saying that a debt collector bringing or threatening a foreclosure action to collect a time-barred mortgage debt might be violating the FDCPA. The CFPB's advisory opinion says:

• The FDCPA and Regulation F, which implements the FDCPA, prohibit a debt collector from suing or threatening to sue to collect a time-barred debt.
• This prohibition applies even if the debt collector isn't aware that the debt is time-barred.

FDCPA Violations Concerning Time-Barred Mortgages as a Defense to Foreclosure

So, if a debt collector covered by the Fair Debt Collection Practices Act brings or threatens to bring a state court foreclosure action to collect a time-barred mortgage debt, that action probably violates the FDCPA. And in most states, if the applicable statute of limitations has expired, you can raise this issue as an affirmative defense in a foreclosure action, preventing a debt collector from recovering on the debt using a judicial process.

Even if a debt collector threatens a nonjudicial foreclosure action, that collector might still be subject to the FDCPA, which generally prohibits taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if the debt collector has no present right or intention to do so.

Remedies for FDCPA Violations

In the case of any FDCPA violation, the consumer may recover:

• actual damages
• statutory damages up to $1,000, and
• attorneys' fees and costs.

FDCPA violations can also sometimes be raised as a defense to foreclosure.

Some States Have Debt Collection Practices Laws

Additionally, many states have debt collection practices statutes with a broader scope than the FDCPA.

Talk to a Lawyer

Talk to a lawyer to determine if the FDCPA applies to your foreclosure. Also, remember that any given foreclosure or legal situation has many potential claims and defenses.

If you think you've been the victim of an FDCPA violation or multiple violations, you should speak to a qualified attorney who is knowledgeable about the FDCPA, as well as foreclosure defenses generally, and can advise you on what to do in your particular situation.