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LEGAL ISSUES UPDATE -Foreclosure Process: “Debt Collection” Under FDCPA?

Posted By USFN, Wednesday, April 30, 2014
Updated: Monday, October 12, 2015

April 30, 2014


by Valerie Holder
RCO Legal, P.S.
USFN Member (Alaska, Oregon, Washington)

In 1977, the Federal Debt Collection Practices Act (FDCPA) was enacted to “eliminate abusive debt collection practices by debt collectors, [and] to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged.” FDCPA § 1692(f)(6)802(e), 15 U.S.C. 1692(e). As the economy took a downward turn in recent years, more consumers were unable to repay their debts, and actions against “debt collectors” increased. Debt Collection (Regulation F); Advanced Notice of Proposed Rulemaking, Federal Register 78 (12 Nov. 2013): 67851. With consumers not making mortgage payments, uncertainty exists regarding whether an enforcer of a security instrument meets the definition of a “debt collector” under the FDCPA.

Courts have held that “enforcement of a security interest through a nonjudicial forfeiture does not constitute the collection of a debt for purposes of the FDCPA.” Baranti v. Quality Loan Service Corp., 2007 WL 26775 *3; Roman v. Nw. Tr. Services, Inc., C10-5585BHS, 2010 WL 5146593 *3 (W.D. Wash. Dec. 13, 2010); Hulse v. Ocwen Federal Bank, FSB, 195 F. Supp. 2d 1188, 1204 (D. Or. 2002); Jordan v. Kent Recovery Services, 731 F. Supp. 652, 657-58 (D. Del. 1990). In some states the nonjudicial process eliminates the ability to obtain a deficiency judgment, while a judicial foreclosure allows for a monetary judgment and pursuit of deficiency; there is more uncertainty regarding whether judicial foreclosure is fairly characterized as debt collection.

Two recent opinions from two different courts held that enforcement of a security instrument in nonjudicial and judicial foreclosure is not debt collection.

Judicial Foreclosure on Deed of Trust

Doughty v. Holder addressed whether the judicial foreclosure of a deed of trust constitutes “debt collection,” as defined under the FDCPA. 2014 WL 220832 (E.D. Wash.). In Doughty, the author’s firm commenced an action for judicial foreclosure of a deed of trust on behalf of the beneficiary. The complaint sought judgment against defendants for monies due and specified that the plaintiff waived any right to a deficiency judgment. That is, the plaintiff sought nothing more than to foreclose on the deed of trust. One of the named defendants was Cheryl Doughty (Cheryl), daughter of the deceased borrower Raoul Doughty. Cheryl was named as a defendant to divest her of her interest in the property.

An individual named “Sheryl Doughty” was mistakenly served with the summons and complaint based upon the belief that she was the “Cheryl Doughty” named in the complaint. Sheryl Doughty (Sheryl) was dismissed from the judicial foreclosure action. Sheryl brought a separate action against the author and her firm for violation of the FDCPA, claiming that they were debt collectors who engaged in unfair and deceptive acts. Following a motion for summary judgment filed by the author and her firm, the court held that “[s]o long as the foreclosure proceedings, be they non-judicial or judicial, involve no more than mere enforcement of security interests, the FDCPA does not apply.” The court found that the plaintiffs were served with a lawsuit naming them as defendants and the lawsuit’s sole purpose was to foreclose potential interests in the subject real property. Even assuming the FDCPA applied here, the court further found that there were not any abusive collection practices. In summary, the court granted the motion for summary judgment filed by the author and her firm and judgment, without an award of attorney fees, was entered.

Nonjudicial Foreclosure
In Dillon v. Chase Home Finance, LLC, 2014 WL 466212 (E.D. Mo.), plaintiffs sued the foreclosing lender and its counsel, seeking to enjoin a foreclosure sale and alleging FDCPA violations. The court determined that the FDCPA did not apply because the lender’s counsel was acting as a trustee under a deed of trust and was therefore not acting as a debt collector. Further, the court held that foreclosing on a security interest is not debt collection activity for the purposes of § 1692g, as the FDCPA specifically says that a person in the business of enforcing security interests is not a debt collector for the purposes of § 1692(f)(6), which reasonably suggests that such a person is not a debt collector for purposes of the other sections of the FDCPA.

The court also cited a federal case in Mississippi, which held that a law firm that serves as trustee or represents a mortgagee in a nonjudicial foreclosure is not a debt collector. Fouche v. Shapiro & Massey, LLP, 575 F. Supp. 2d 776, 781 (S.D. Miss. 2008). Ultimately, the court in Dillon granted the motion to dismiss filed by the defendants.

The ambiguity present in the definition of “debt collector” under the FDCPA needs to be addressed and clarified. The two cases discussed here support the proposition that the foreclosure process is not debt collection. However, other states and circuits have held to the contrary. See Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373 (4th Cir. 2006) (holding that the FDCPA applies to lawyers conducting a deed of trust foreclosure who inform the debtor of the amount required to reinstate the mortgage); Kaltenbach v. Richards, 464 F.3d 524 (5th Cir. 2006) (holding the FDCPA can apply to a party whose principal business is enforcing security interests); Glazer v. Chase Home Fin. LLC, 704 F.3d. 453 (6th Cir. 2013) (holding that mortgage foreclosure is debt collection under the FDCPA); Reese v. Ellis, Painter, Ratterree & Adams, LLP, 687 F.3d 1211 (11th Cir. 2012) (holding that a foreclosure firm qualified as a debt collector under the FDCPA because it regularly engaged in the business of collecting debts).

Congress could not have intended that a federal statute would be interpreted to provide inconsistent guidance to foreclosing attorneys and trustees. The FDCPA needs to be amended or the Supreme Court of the United States should provide clarification on the statute to rectify the discrepancy across the nation regarding who or what qualifies as a debt collector.

© Copyright 2014 USFN. All rights reserved.
Spring 2014 USFN Report

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