Are You a Debt Collector or Not? In The Counsels Corner

Released around the time Americans huddled around their living rooms and favorite sport locations to kick off College basketball’s March Madness, the U.S. Supreme Court announced their One Seed case with a 9-0 sweep on March 20, 2019. The much awaited Obduskey v. McCarthy & Holthus LLP decision answered the question of whether a business engaged in no more than nonjudicial foreclosure proceedings is a debt collector under the FDCPA. However, it left other related questions unanswered for another time.

Of our 50 states, 29 states allow for nonjudicial foreclosure proceedings. In these 29 states, businesses, such as a law firm, engaged in nonjudicial foreclosure proceedings can argue they are not a debt collector under the FDCPA, so long as they do not take or threaten to take dispossession of the property when there is no right to, no present intention to, or the law prohibits dispossession (15 U.S.C. 1692f(6)).

The Court heavily relied on the plain language and congressional intent of the FDCPA to determine whether McCarthy was subject to the Act’s definition of debt collector. Specifically, the Court held that security-interest enforcers do not fall within the scope of the primary definition of debt collector as defined in section 1692a(6) of the Act; instead, security-interest enforcers have a limited-purpose restriction as covered in 1692f(6) which is outside the definition of 1692a(6). Moreover, the Court reasoned that the present language of the Act is a compromise between competing versions of the bill, one which would have excluded security-interest enforcement from the Act, and another which would have treated it like ordinary debt collection.

After the high-fiving is over from businesses engaged in these types of proceedings, many are asking “now what? If this is a win, why don’t I feel like I won something”? Like any important opinion, it will take time for the industry to digest the full impact of Obduskey. Mortgage lenders and servicers will want to consider the ease or lift this clarity may bring in their oversight of law firms or businesses engaged in nonjudicial foreclosure proceedings: Will certain disclosures no longer be required, should demand letters no longer be required to be sent, are debt disputes or debt validation requests handled in a certain manner, whether this impacts judicial foreclosure proceedings, etc.? These questions are left unanswered. Further, walking back prior regulations are always met with hesitancy.

Law firms will want to consider these same questions, and also what the firm’s principal purpose of business is. Not all Court holdings require a “Who am I?” question to be ask and answered, but this one does. If the principal purpose of a firm is the enforcement of security interests, like Defendant McCarthy, then it is “also include[d]” as a debt collector “[f]or the purpose of section 1692f(6)” only and not the larger 1692a(6) debt collector definition. The Court reasoned that “the word ‘also’” strongly suggests that security-interest enforcers do not fall within the scope of the primary definition of a debt collector. Helpful considerations are found on page 13 of the slip opinion that deal with notices that may be construed by homeowners as an attempt to collect a debt backed up by the threat of foreclosure (spoiler, the Court assumed that the notices sent by McCarthy were antecedent steps required under state law to enforce a security interest and thus not an attempt to collect a debt).

Unfortunately, firms cannot make the principal purposes analysis in a vacuum. Engaging in a nonjudicial foreclosure proceeding is not a license to abuse debt collection practices like repetitive nighttime phone calls or deceptive collection practices; it does not grant blanket immunity for the Act. Thus, law firms within the scope of this opinion should continue to maintain those appropriate controls that might transform a security-interest enforcer into a debt collector subject to 1692a(6) of the Act. Moreover, firms will want to consider whether sending loss mitigation solicitations or breach letters, while not required under law, would bring the firm under the “debt collector” definition as under 1692a(6).

The Court’s holding will also impact those plaintiff attorneys that heavily relied on the classification of a law firm under these circumstances as a debt collector. Ultimately, this should impact mortgage lenders and servicers by reducing the cost in terms of getting to a final foreclosure as FDCPA allegations can delay the foreclosure process significantly. Litigation departments will want to examine all pending lawsuits impacting nonjudicial foreclosures under the Act to determine if lawsuits could be eliminated.