Supreme Court Says Foreclosure Firms Aren’t Debt Collectors Under the FDCPA

The U.S. Supreme Court has decided that businesses that conduct nonjudicial foreclosures don’t qualify as debt collectors under federal law.

In a unanimous 9-0 decision, the U.S. Supreme Court determined in the case of Obduskey v. McCarthy & Holthus, LLP​, No. 17-1307 (March 20, 2019) that the federal Fair Debt Collection Practices Act (FDCPA) doesn't broadly apply to firms conducting nonjudicial foreclosures. With this decision, the Supreme Court has made it harder for borrowers to fight this type of foreclosure.

Case Background Information

In the Obduskey case, Wells Fargo, working as a loan servicer, sought to foreclose a home owned by Dennis Obduskey, a Colorado resident. Obduskey defaulted on the loan in 2009. Over the next six years, nonjudicial foreclosure proceedings in Colorado were started several times but weren't completed.

Eventually, Wells Fargo hired McCarthy & Holthus—a foreclosure law firm—to handle the foreclosure. McCarthy & Holthus mailed Obduskey a letter that stated the firm could be considered a debt collector and that it was starting a nonjudicial foreclosure. Obduskey disputed the debt under the FDCPA, but McCarthy & Holthus didn't verify the debt, as required by the FDCPA. Instead, the firm began a nonjudicial foreclosure.

Overview of the Fair Debt Collection Practices Act

The FDCPA (15 U.S.C. § 1692 and following) prohibits debt collectors from using overly-aggressive, abusive, and deceptive collection tactics when trying to collect from a debtor. Under this federal law, a debt collector must advise you in its first letter—or, if it doesn't, by law it has five days from the initial contact to inform you—that you have 30 days to dispute the validity of the debt. If you dispute the debt's validity within the 30 days, the collector must send you verification of the debt.

If you send a written request for verification of the debt within the 30 days, the collector must also stop its collection efforts and can't resume them before mailing you the verification.

The District Court's Decision: Nonjudicial Foreclosure Proceedings Don't Constitute Debt Collection

Because the firm didn't stop its collection efforts nor mail him a debt verification, Obduskey filed a lawsuit claiming that McCarthy & Holthus violated the FDCPA. The District Court disagreed and noted that while courts have not agreed as to whether the FDCPA applies to nonjudicial foreclosures, the majority view is that nonjudicial foreclosure proceedings don't constitute debt collection. So, McCarthy & Holthus was not required to comply with the FDCPA. Obduskey then appealed the court's decision.

The Tenth Circuit Also Says the FDCPA Doesn't Apply to Nonjudicial Foreclosures

On appeal, the Tenth Circuit agreed with the District Court and stated entities engaged in nonjudicial foreclosure actions are not debt collectors under the FDCPA. Therefore, while Obduskey had made sufficient claims that McCarthy & Holthus had violated the FDCPA, the FDCPA doesn't apply to a nonjudicial foreclosure, like Obduskey's, in Colorado. (A judicial foreclosure, on the other hand, might be covered under the FDCPA because of a deficiency judgment.)

Obduskey then appealed to the U.S. Supreme Court.

The U.S. Supreme Court Affirms: Nonjudicial Foreclosures Aren't Covered

Before the Supreme Court took up the matter, some courts had said nonjudicial foreclosures were covered by the FDCPA, while others said they weren't. Ultimately, after reviewing the matter, the Supreme Court decided that a business conducting nonjudicial foreclosure proceedings is not a "debt collector" under the FDCPA and therefore doesn't have to comply with the fundamental provisions of this law.

In making its decision, the Court determined that McCarthy & Holthus didn't fall within the scope of the FDCPA's primary definition of "debt collector." The court found the text of the FDCPA itself persuasive, as it provides a limited purpose definition relating to enforcing security interests. Specifically, the court noted that the FDCPA says that "for the purpose of section 1692f(6)" (which involves taking or threatening to take any nonjudicial action) the term debt collector "also includes" those enforcing security interests. The court was convinced that by using the term "also," the statute meant that entities that enforce security interests don't fall within the main definition of a debt collector, which means most provisions of the FDCPA don't apply to nonjudicial foreclosures.

The Supreme Court also looked at the FDCPA's legislative history. The Court noted that the language of the final statute was the result of a compromise between different versions of the bill. One version completely excluded security interest enforcement from the statute, and another would have treated it like ordinary debt collection. This history suggests that the current version of the law represents a compromise between including nonjudicial foreclosures under the FDCPA and fully excluding them from the law.

Aftermath of the Obduskey Decision

The Supreme Court's ruling in Obduskey is a victory for the foreclosure industry. Every jurisdiction—including federal and state—in the United States must follow U.S. Supreme Court cases. This decision could invalidate thousands of lawsuits in states like California, Colorado, and Minnesota where nonjudicial foreclosures are the norm and where homeowners are currently fighting nonjudicial foreclosures based on FDCPA violations. (Homeowners' attorneys have often used violations of the FDCPA to challenge foreclosures.)

But both the Tenth Circuit and the Supreme Court did not go so far as to say that every firm engaged in nonjudicial foreclosures isn't subject to the FDCPA or that all nonjudicial foreclosure activities aren't debt collection. If a firm tries to induce a borrower to pay money by threatening foreclosure, the FDCPA might apply.

Also, as far as whether law firms and businesses that handle nonjudicial foreclosures now have more leeway to engage in abusive collection practices as a result of this case, the Court's stated that this decision is "not to suggest that pursuing nonjudicial foreclosure is a license to engage in abusive debt collection practices like repetitive nighttime phone calls." The Supreme Court also said that the Court must enforce the statute that Congress enacted, and Congress is free to expand the FDCPA's reach if it wishes. However, changes to the FDCPA are unlikely at this time.

Effective date: March 20, 2019