On November 14, the Bureau of Consumer Financial Protection filed an amicus brief with the United States Supreme Court, arguing a law firm's nonjudicial foreclosure actions to enforce a security interest on a mortgage debt fell outside the purview of the Fair Debt Collection Practices Act because the activity did not constitute "debt collection."
The issue is currently under review before the Supreme Court in Obduskey v. McCarthy & Holthus LLP, No. 17-1307 (2018).
This action originally arose out of a home mortgage loan that petitioner Dennis Obduskey applied for and obtained from Magnus Financial Corporation in 2007, secured by Obduskey's Colorado home. Wells Fargo Bank subsequently took over as servicer of the loan, on which Obduskey subsequently defaulted in 2009. Wells Fargo spent the next several years unsuccessfully attempting to foreclose on the home. In 2014, Wells Fargo hired respondent McCarthy & Holthus LLP to initiate non-judicial foreclosure proceedings against Obduskey in accordance with procedures set forth under Colorado state law.
As a part of its foreclosure attempts, McCarthy & Holthus sent Obduskey a letter that contained, among other things, the amount of the outstanding loan, the name of the creditor, and a disclosure regarding the potential imposition of interest and fees, and it stated that McCarthy & Holthus intended to seek non-judicial foreclosure of the home. The letter also included a statement that McCarthy & Holthus "may be considered a debt collector attempting to collect a debt" as well as a disclosure regarding Obduskey's rights to dispute the debt or seek validation akin to the disclosure required under Section 1692g of the FDCPA. Although Obduskey disputed the debt, McCarthy & Holthus provided no verification but instead initiated a non-judicial foreclosure proceeding.
Obduskey filed an action against McCarthy & Holthus and Wells Fargo in the United States District Court for the District of Colorado, alleging the defendants violated the FDCPA and Colorado state law. The district court dismissed the FDCPA claims against McCarthy & Holthus and Wells Fargo based on what it perceived as the majority view that foreclosure proceedings do not constitute the collection of a debt. On appeal, the Court of Appeals for the Tenth Circuit affirmed the district court because in Colorado, a non-judicial foreclosure proceeding only allows for the sale of the property but does not automatically entitle the trustee to the collection of the sale proceeds; this must be done through a separate action. In other words, the enforcement of a security interest is not an attempt to collect money from a debtor and in general, the FDCPA only governs entities that attempt to collect money. The Court also found that a contrary decision would create a conflict between the FDCPA and Colorado state law, which requires certain disclosures to borrowers when initiating non-judicial foreclosure proceedings. However, the Court of Appeals noted that there is somewhat of a circuit split with respect to this issue between the Ninth Circuit, along with numerous district courts, and the Fourth, Fifth, and Sixth circuits. Finally, the Court of Appeals found that both defendants were not debt collectors under the FDCPA. Obduskey again appealed and the Supreme Court granted certiorari on June 28, 2018.
In its amicus brief, the BCFP largely echoes the Tenth's Circuit's findings. First, the BCFP argues that McCarthy & Holthus's non-judicial foreclosure action against Obduskey was not "debt collection" under the FDCPA because the FDCPA's text is clear that enforcement of a security interest, without very specific other prohibited activity mentioned in Section 1692f(6), does not constitute debt collection. Second, the BCFP argues that McCarthy & Holthus's actions were specifically required by Colorado state law. Therefore, to find its actions in violation of the FDCPA would throw the FDCPA into conflict with state law and would have hindered McCarthy & Holthus from complying with state law. While the BCFP's argument largely follows the reasoning of the Tenth Circuit, it could also signal the agency taking on an ever-increasing pro-business tilt following Mick Mulvaney's appointment as acting director of the BCFP one year ago.
Oral arguments have not yet been scheduled. We will continue to monitor this case and provide updates accordingly.
The Troutman Sanders' Consumer Financial Services Law Monitor blog offers timely updates regarding the financial services industry to inform you of recent changes in the law, upcoming regulatory deadlines and significant judicial opinions that may impact your business. To view the blog, click here
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.