Entities Engaged Solely In The Enforcement of Security Interests Are Not "Debt Collectors" Under The Fair Debt Collection Practices Act

The United States Supreme Court recently issued a unanimous decision in Obduskey v. McCarthy & Holthus LLP holding that entities engaged in the principal purpose of enforcing security interests are not, with limited exceptions, subject to the general regulations of the federal Fair Debt Collection Practices Act (FDCPA). This decision provides important guidance to lenders, servicers, and their representatives who deal with defaulting borrowers and foreclosures.

The FDCPA heavily regulates activities of "debt collectors," who are broadly defined in the statute.

The FDCPA was enacted in 1978 to limit abusive debt collection practices and sets forth regulations governing the activities of "debt collectors," who are broadly defined as "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." 15 U.S.C. §1692a(6). Notably, the FDCPA's definition of a "debt collector" also states that for certain purposes, it "also includes" entities whose principal purpose is "the enforcement of security interests" (i.e., judicial or non-judicial foreclosures under state law). 15 U.S.C. §1692a. Importantly, an entity's status as a "debt collector," as opposed to merely an enforcer of security interests, determines which provisions of the FDCPA apply. The confusion caused by these seemingly conflicting definitions has resulted in numerous lawsuits around the country, with attendant conflicting circuit court decisions on the issue.

Although narrowly tailored, the Obduskey decision finds that entities engaged in the enforcement of security interests are not debt collectors and, therefore, are not generally subject to FDCPA regulations, with certain exceptions.

In Obduskey, the plaintiff borrower defaulted on his mortgage loan, after which, at the secured lender's behest, the lender's law firm (the Law Firm) initiated non-judicial foreclosure proceedings under Colorado state law. The borrower responded to the Law Firm's foreclosure notice with a letter disputing the underlying debt which, under the FDCPA, requires "debt collectors" to cease collection activities until other statutory conditions are first satisfied. Notwithstanding the borrower's letter, the Law Firm continued with the non-judicial foreclosure and the borrower sued the firm for violating the FDCPA. The Law Firm prevailed before the Colorado federal district court, which found that the Law Firm was not a "debt collector," and the district court's decision was later affirmed on appeal.

The question presented to the Supreme Court was whether the Law Firm, in its undisputed role as an enforcer of security interests via foreclosure, was subject to the broader FDCPA regulations governing "debt collectors." The Supreme Court concluded that it was not.

As explained in Obduskey, in providing a limited-purpose definition (and accompanying restrictions) for entities that engage in the "enforcement of security interests," Congress intended to exclude these entities from the broader definition of "debt collectors" under the statute. Therefore, while the enforcement of security interests (such as non-judicial foreclosure) may be a debt collection activity, entities engaged solely in such activities are subject only to the more limited restrictions for such entities as set forth in the statute. In its decision, the Supreme Court further explained that treating the activity of security enforcement differently may avoid conflicts with state law for non-judicial foreclosure matters, and that the FDCPA's legislative history shows that the activity of security interest enforcement was purposefully removed by Congress from the general definition of "debt collectors" under the statute, presumably to avoid conflict with state law.

Notably, the Obduskey decision also addressed and rejected the borrower's contention that, by sending notices that ordinary borrowers would understand to be an attempt to collect a debt, the Law Firm qualified as a debt collector. The Court reasoned that, because the parties did not dispute that such notices were required under Colorado law, the delivery of such notices did not transform the law firm into a "debt collector" under the statute. Rather, because the FDCPA partially excludes "the enforcement of security interests" from regulation, that exclusion also applied to "the legal means required to do so."

As a result, the Supreme Court concluded that entities whose principal purpose is the enforcement of security interests and, specifically, non-judicial foreclosure, are not "debt collectors" under the FDCPA, and, therefore, such entities are not subject to the FDCPA's general regulations, other than those specifically applicable to such entities.

Of course, the decision in Obduskey does not provide a "free pass" to avoid FDCPA compliance for all entities engaged in foreclosure. Rather, and as reflected in the concurrence filed by Justice Sotomayor, entities engaged in foreclosure through judicial processes might remain generally subject to the FDCPA as "debt collectors."

The Obduskey decision settles conflicting circuit decisions and provides much needed assurance to entities engaged solely in non-judicial foreclosures that: (1) such entities are not "debt collectors;" and (2) compliance with notification requirements under state non-judicial foreclosure laws will not transform an enforcer of security interests into a "debt collector" as generally defined under the FDCPA.

CONSIDERATIONS FOR LENDERS

For lenders, loan servicers, and others involved in the mortgage industry, the Obduskey decision provides much needed guidance regarding the applicability of FDCPA regulations to law firms and other lender and servicer representatives assisting with non-judical foreclosures, and may ultimately reduce the number of lawsuits filed by defaulting borrowers in an attempt to delay or avoid foreclosure. That said, ensuring ultimate compliance with the FDCPA remains a very complicated matter, and lenders, servicers, and others involved in the industry should take care to familiarize themselves with the statute and remain abreast of current developments in the law.