The U.S. Supreme Court recently held oral arguments in Obduskey v. McCarthy & Holthus LLP on January 7, 2019. The Supreme Court will decide whether the federal Fair Debt Collection Practices Act or FDCPA applies in a nonjudicial foreclosure action. While courts, generally, accept that the FDCPA covers judicial foreclosures, the lower federal courts are split concerning nonjudicial proceedings.
As background, the FDCPA is a consumer protection law that imposes detailed, specific, requirements on third-party debt collectors throughout the collections process. Therefore, the Supreme Court's decision in this matter will be important to commercial entities that conduct nonjudicial foreclosures (outside of court) on behalf of mortgage lenders. The ability to conduct nonjudicial foreclosure depends on state law. Among the states in which we practice, nonjudicial foreclosure is available in Michigan.
Law firm Started Nonjudicial Foreclosure for Mortgage Company
In Obduskey, after a mortgage borrower defaulted, the lender hired a law firm to conduct a nonjudicial foreclosure to seize and sell real estate secured by the mortgage. The 10th Circuit said that the FDCPA did not apply because the law firm was not trying to collect money to satisfy a debt. Rather, it was attempting to seize the property that the mortgage secured and sell it.
Specifically, the court said that "enforcing a security interest is not an attempt to collect money from the debtor ..." The court noted that the law firm's failure to demand payment or use "foreclosure as a threat to elicit payment" support the conclusion that debt collection was not occurring.
Sixth Circuit on the Other Side of the Issue
Three of the four states in which we mainly practice (Michigan, Ohio and Kentucky) are in the 6th Circuit, which has come to a different conclusion regarding this issue. In Glazier v. Chase Home Finance LLC, the 6th Circuit said that both judicial and nonjudicial foreclosures are attempts to collect debt because the ultimate purpose is to get the underlying mortgage debt paid. Therefore, the 6th Circuit has held that FDCPA applies to both judicial and nonjudicial foreclosures.
As the court explained, the debt could be paid either through "forcing a settlement" and getting the borrower to make payments in lieu of foreclosure, or by auctioning the foreclosed property and paying down the debt with the proceeds.
Federal Agency Weighs In
Notably, the U.S. Consumer Financial Protection Board or CFPB has filed an amicus brief with the Supreme Court urging it to affirm the 10th Circuit's holding that the FDCPA did not apply to the law firm's nonjudicial foreclosure actions.
Advocates for lenders, collection agencies, creditors and others involved in debt collection await the U.S. Supreme Court's decision with anticipation.