Nonjudicial Foreclosure Is Not Subject to the FDCPA, Supreme Court Rules

The Supreme Court ruled unanimously today that nonjudicial foreclosure is not subject to regulation by the federal Fair Debt Collection Practices Act, known as the FDCPA, 15 U.S.C. § 1692-1692p.

The opinion for the Court by Justice Stephen G. Breyer contained an important caveat: Nonjudicial foreclosure is exempt from the FDCPA only with regard to actions required by state law.

The Circuit Split

After a homeowner defaulted on his mortgage, the lender hired a law firm, which gave notice that it was retained to conduct nonjudicial foreclosure under Colorado law. The homeowner responded with a letter purporting to invoke rights under Section 1692(g) of the FDCPA, which obliges a debt collector to halt collection activities until it provides the debtor with a “verification of the debt.”

However, the law firm proceeded to initiate nonjudicial foreclosure. The homeowner then filed suit alleging violation of the FDCPA. The district court dismissed the suit, finding that the law firm was not a “debt collector” within the purview of the FDCPA. The Tenth Circuit affirmed, holding that merely enforcing a security interest through nonjudicial foreclosure is not governed by the FDCPA.

The circuits were split. The Fourth, Fifth and Sixth Circuits held that the FDCPA applies to nonjudicial foreclosure, while the Ninth and Tenth Circuits concluded that it does not. The Supreme Court granted certiorari on June 28, 2018, to resolve the split and heard oral argument on January 7.

The Statutory Provisions

The FDCPA applies to “debt collectors,” defined in the first sentence of 15 U.S.C. § 1692a(6) as someone who “regularly collects or attempts to collect, directly or indirectly, debts owed . . . or due another.” The definition makes the statute applicable to a law firm pursuing judicial foreclosure when the lender is entitled to a deficiency judgment.

The case turned on the meaning of the third sentence in Section 1692a(6), which applies to enforcement of security interests. “For the purpose of section 1692f(6) [governing the conduct of someone repossessing property nonjudicially],” the third sentence of Section 1692a(6) says that the “term [debt collector] also includes any person who uses [the mail or interstate commerce] in any business the principal purpose of which is the enforcement of security interests.”

The third sentence applies to nonjudicial foreclosure. However, Section 1692f(6) does not impose all of the FDCPA’s regulations on those who only enforce security interests. Section 1692f(6) only prohibits certain activities, such as threatening to repossess when there is no intention of repossessing or there is no right to repossess. The law firm was not alleged to have violated the proscriptions in Section 1692f(6).

The Unanimous Opinion

Writing for the Court, Justice Breyer said that the FDCPA would apply to nonjudicial foreclosure if the statute contained only the primary definition in the first sentence of Section 1692a(6). If the third sentence did not contain the reference to someone whose principal business “is the enforcement of security interests,” he said that a person engaged in nonjudicial foreclosure proceedings “would qualify as a debt collector for all purposes,” because foreclosure “is a means of collecting a debt.”

Justice Breyer said that the primary definition of “debt collector” in the first sentence in Section 1692a(6) does not apply only to someone who attempts to collect from a debtor. Even if nonjudicial foreclosure were not a direct attempt to collect a debt, he said, “it would be an indirect attempt to collect a debt.” [Emphasis in original.]

The third sentence in Section 1692a(6) changed the result, however. The phrase “[f]or the purpose of section 1692f(6),” Justice Breyer said, “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?” [Emphasis in original.]

Justice Breyer also surmised that Congress did not intend for the FDCPA to be generally applicable to nonjudicial foreclosure “to avoid conflicts with state nonjudicial foreclosure schemes.”

For “those of us who use legislative history to help interpret statutes,” he said that “the history of the FDCPA supports our reading.” He alluded to how competing versions of the bill would or would not have made nonjudicial foreclosure subject to regulation. The third sentence, he said, “has all the earmarks of a compromise: The prohibitions contained in Section 1692f(6) will cover security-interest enforcers, while the other ‘debt collector’ provisions of the Act will not.”

Caveats in the Opinion

Justice Breyer added two caveats to say that specific acts in connection with nonjudicial foreclosure could conceivably be subject to the FDCPA, although nonjudicial foreclosure generally is not.

The homeowner argued that the third sentence applies only to a “repo man,” meaning someone who repossesses personal property and has no interaction with the debtor. Judge Breyer rejected this contention, saying, “if Congress meant to cover only the repo man, it could have said so.”

In the same paragraph, Justice Breyer went on to say it is “at least plausible that ‘threatening’ to foreclose on a consumer’s home without having legal entitlement to do so is the kind of ‘nonjudicial action’ without ‘present right to possession’ prohibited by that section.” He went on to say parenthetically, “We need not, however, decide precisely what conduct runs afoul of Section 1692f(6).”

Of greater significance, Justice Breyer said near the end of his 14-page opinion, “This is not to suggest that pursuing nonjudicial foreclosure is a license to engage in abusive debt collection practices like repetitive nighttime phone calls . . . .”

Because the case before the Court involved “only steps required by state law, we need not consider what other conduct (related to, but not required for, enforcement of a security interest) might transform a security-interest enforcer into a debt collector subject to main coverage of the Act.” [Emphasis in original.]

The Concurring Opinion

Justice Sotomayor concurred in the opinion. Calling it “a close case,” she said that Justice Breyer made “a coherent whole of a thorny section of statutory text.” She was persuaded to concur because the third sentence would be superfluous “if all security-interest enforcement is already covered” by the first sentence.

Justice Sotomayor made two points: (1) “[T]oday’s opinion does not prevent Congress from clarifying today’s opinion if we have gotten it wrong,” and (2) enforcing a security interest does not confer blanket immunity from the FDCPA.

“I would see as a different case one in which the defendant went around frightening homeowners with the threat of foreclosure without showing any meaningful intention of ever actually following through.” In such a case, she said, there would be a question of whether the person was actually in the business of enforcing a security interest or “was simply using that label as a stalking horse for something else.”