The Fair Debt Collection Practices Act (FDCPA) regulates the activities of “debt collectors,” but the confusing and convoluted statutory definition of the gateway term itself has led to both extensive litigation and contradicting circuit decisions. However, in a recent unanimous opinion, Obduskey v. McCarthy, 586 U.S. ___ (2019), the United States Supreme Court has attempted to alleviate this confusion, at least with respect to nonjudicial foreclosures.
At issue before the court was whether a law firm engaged in a nonjudicial foreclosure action was a “debt collector” under the FDCPA.
As background, Obduskey, the mortgagor, defaulted upon his loan and, in compliance with Colorado law, received a letter from the lender’s law firm regarding the commencement of foreclosure proceedings. Obduskey disputed the debt in writing, thereby invoking §1692g(b) of the FDCPA, which requires a “debt collector” to “cease collection” until it “obtains verification of the debt.” Instead, the law firm proceeded with initiating a nonjudicial foreclosure action and Obduskey, in turn, filed a federal lawsuit alleging that the law firm failed to cease collection and verify the debt, in violation of the FDCPA.
The FDCPA’s definition for “debt collector” contains two parts, which the Supreme Court referenced as the “primary definition” and the “limited-purpose” definition. The “primary definition” states that a debt collector "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 owed or asserted to be owed or due another. 15 U.S.C. §1692a(6)."
The court stated that, had Congress stopped there, “a business engaged in nonjudicial foreclosure proceedings would qualify as a debt collector for all purposes” as a foreclosure is a “means of collecting a debt,” regardless of whether payment for that debt is being sought from the debtor, or from the sale of the property itself. However, Congress didn’t stop with just this primary definition. Instead, it included an additional sentence, which the court referenced as the “limited-purpose definition,” which states that "For 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.” [Emphases added.]
This extra sentence, in the eyes of the court, completely changed the debt collector definition. “This phrase, particularly the word ‘also,’ strongly suggests that one who does no more than enforce security interests does not fall within the scope of the general definition. Otherwise why add this sentence at all? ... And if security-interest enforcers are covered by the primary definition, why would Congress have needed to say anything special about §1692f(6)?”
The court went on to explain that the FDCPA’s legislative history additionally supported this reading, as Congress considered one version which would have subjected security-interest enforcers to the act’s full coverage, and another version which would have completely excluded security-interest enforcers from any of the act’s requirements. The enactment of the present version therefore had “all the earmarks of a compromise.”
Section 1692f(6) essentially prohibits the “taking or threatening” of nonjudicial action where there’s a lack of right or intent for same. So, pursuant to the court’s ruling, nonjudicial security-interest enforcers are only debt collectors for purposes of this section alone, and are therefore excluded from the Act’s various other duties and requirements—including the requirement to “cease collection” and “verify” a debt upon receipt of a debt dispute.
As to the concern that the court’s ruling would “open a loophole, permitting creditors and their agents to engage in a host of abusive practices forbidden by the Act,” the Court stated that Congress may feel that state protections against these abuses are adequate, “or it may choose to expand the reach of the FDCPA,” but that the court is simply required to enforce “the statute that Congress enacted.”
Nonjudicial foreclosures, as the term implies, typically occur absent court involvement, whereas judicial foreclosures involve a full, often lengthy, court process. However, at issue in this case was a Colorado nonjudicial foreclosure action which requires a court order authorizing sale, which as the Supreme Court noted, is more a hybrid of the two. The court also noted that Colorado wouldn’t permit a deficiency judgment absent a separately filed action—and seemed to emphasize that the availability of a deficiency judgment may be a key distinction between judicial and nonjudicial foreclosures.
The court was careful to leave the question as to whether those who judicially enforce mortgages were excluded from the primary debt collector definition “for another day.” However, if a judicial foreclosure state had or adopted anti-deficiency legislation, and law firms in those states limited their practice to foreclosures without deficiencies, they may well argue they are not debt collectors, similar to the firm in Obduskey.