January 23, 2020

Enforcers of Security Interests in Nonjudicial Foreclosure Proceedings Are Not Subject to Many Provisions of the Fair Debt Collection Practices Act

In March 2019, the U.S. Supreme Court issued a narrow holding that debt collectors enforcing security interests in nonjudicial proceedings are subject to only one section (Section 1692f(6)) of the Fair Debt Collection Practices Act (FDCPA). This is because such debt collectors do not actually fall under the act’s definition of “debt collector” for any of the other sections. Such entities are essentially free from all but one section of FDCPA regulation as long as the entity takes only those steps required by state law to enforce the security interest in a nonjudicial proceeding.

The case, Obduskey v. McCarthy & Holthus LLP, 139 S. Ct. 1029 (2019), dealt with nonjudicial foreclosure, an option to foreclose on real property without filing a lawsuit that is available, in some version or another, to creditors in roughly half of the states. The plaintiff, Mr. Obduskey, defaulted on his mortgage and was notified by the law firm representing his lender that the lender was commencing nonjudicial foreclosure proceedings.

The FDCPA includes a provision that allows borrowers to dispute their debt and delay collection until the debt can be verified by the collector. Taking advantage of the FDCPA’s provision, Mr. Obduskey disputed his debt, believing he had delayed the foreclosure until the law firm could verify the amount of the debt. The law firm, however, disregarded the dispute and continued with the nonjudicial foreclosure.

Mr. Obduskey filed suit arguing that the law firm violated the FDCPA by failing to first verify his debt. The Supreme Court eventually sided with the law firm, holding that entities enforcing security interests via nonjudicial means are not subject to the vast majority of the FDCPA because they are not “debt collectors” under the general definitions of the act. The Court specifically held that those who practice “enforcement of security interests” in nonjudicial proceedings are subject only to the requirements and prohibitions of one narrow section of the FDCPA (Section 1692f(6)), and not any of the other provisions. This is because the general definition of the term, “debt collector” includes the qualifying sentence: “For the purpose of section 1692f(6), such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests.” The Court reasoned that the inclusion of this “limited purpose” definition strongly suggests that one who does no more than enforce security interests does not fall within the scope of the general definition of “debt collector.”

What does this mean for attorneys and agents of secured creditors seeking to foreclose on a mortgage or deed of trust? The only impact of the decision will be felt in states that allow nonjudicial foreclosures, including Tennessee, Georgia, North Carolina, Virginia, West Virginia, and Missouri. In those states, law firms and other creditor’s agents commencing nonjudicial foreclosures need only worry about complying with the prohibitions contained in Section 1692f(6) of the FDCPA. That section prohibits debt collectors from “[t]aking or threatening to take any nonjudicial action to effect dispossession or disablement of property” when certain conditions are not present. Under Obduskey, attorneys and other creditor’s agents need not comply with any of the other provisions of the FDCPA when commencing nonjudicial proceedings. Outside the context of nonjudicial proceedings, the entirety of the FDCPA is still in full force and effect for debt collectors enforcing security interests or collecting other debts.

Mr. Obduskey argued that a loophole would be created by the Court’s holding, allowing secured creditors and their agents to avoid the FDCPA’s regulations and engage in conduct that would otherwise be unlawful. However, the Court reminded Mr. Obduskey that state laws still apply to the enforcement of security interests. And, the Court was careful to remind debt collectors that their actions in commencing nonjudicial proceedings must be confined only to those “steps required by state law” to enforce the security interest. This means that if a debt collector were to take steps beyond the minimum required by state law in enforcing a security interest via nonjudicial proceedings, it is possible that those steps could qualify the secured creditor or its agent as a “debt collector” under the broader definition in the act, and subject itself to the entirety of the FDCPA. The Court declined to directly answer that question for now, but both the majority opinion and concurrence contain strong warnings that the holding does not grant such debt collectors the power to act beyond state laws.

In short, the Obduskey holding could be considered a rollback of the FDCPA as it applies to debt collectors enforcing security interests via nonjudicial proceedings.