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Foreclosure Trustees are Not Debt Collectors despite the CFPB’s Legal Opinion

Posted By USFN, Tuesday, November 29, 2016
Updated: Thursday, November 17, 2016

November 29, 2016

by Wendy Walter
McCarthy Holthus, LLP – USFN Member (Washington)

On October 19, 2016 the Ninth Circuit Court of Appeals published its opinion in Ho v. ReconTrust Company, N.A. The decision affirmed the dismissal of a Fair Debt Collection Practices Act (FDCPA) claim brought against ReconTrust, a nonjudicial foreclosure trustee. In doing so, the opinion clarified that a trustee of a California deed of trust is not a “debt collector.” The holding affirmed Hulse v. Ocwen Federal Bank, a 2002 case decided by the District Court of Oregon (195 F. Supp. 2d 1188). In other circuits (including the Third, Fourth, Fifth, and Sixth) a nonjudicial foreclosure trustee is a debt collector.

In coming to its conclusion, the majority in Ho analyzed the notices in the nonjudicial process and found that the act of issuing such notices doesn’t constitute debt collection as defined by the FDCPA. The opinion analogizes the nonjudicial trustee to the tow truck driver in that the repossession of the car isn’t the act of collecting on the unpaid parking ticket debt, even though the threat of such action can motivate a debtor to pay on a debt.

The majority makes some valuable points related to the interplay of state foreclosure law and federal debt collection law, discussing the “friction” that exists in requiring trustees to comply with both. The FDCPA contains broadly interpreted concepts like “unfair,” “misleading,” as well as “deceptive,” and — to the average person — state foreclosure notice requirements might appear to be unfair, misleading, or deceptive. State legislatures aren’t often doing consumer testing before enacting or modifying statutory foreclosure notices, making it quite possible that the trustee, while trying to comply with state law, might run afoul of the FDCPA in this context. The majority opinion states that the FDCPA wasn’t intended to displace state law, and the U.S. Supreme Court’s recent opinion in Sheriff v. Gillie, 578 U.S. __ (2016), is cited as authority on this point.

In Gillie, the plaintiffs claimed that contracted debt collectors using state letterhead was confusing and deceiving. The Supreme Court unanimously disagreed — finding that a debtor’s impression that a letter from the contractor might be confusing, and cause a consumer to think that the action was being taken by the attorney general, is unconvincing. By reading Justice Ginsburg’s short and pithy opinion, one could conclude that the Supreme Court is weary of FDCPA litigation.

With all of the efforts of the Consumer Finance Protection Bureau (CFPB or Bureau) on regulation of mortgage servicing and the FDCPA, foreclosure law is being stepped on a bit. For example, the CFPB in its servicing rules wants to dictate when a foreclosure must stop or proceed based on certain loss mitigation activity under RESPA. In many cases, state courts are refusing to allow these federal protections to affect the state judicial foreclosure cases. The Ninth Circuit’s take on the presumption against preemption when it comes to state foreclosure laws is very timely and sets the stage for continued friction in the upcoming months as we learn more about the CFPB’s FDCPA rulemaking.

The CFPB filed an amicus brief in support of the plaintiffs in Ho v. ReconTrust and claimed that the FDCPA’s consumer protection purposes would be significantly undermined if trustees were exempt. The Bureau concludes that consumers would be subject to much of the conduct that Congress sought to prohibit under the FDCPA if trustees were exempt. By making this assertion, the CFPB ignores the many states that have consumer protection laws that were designed to cover the state foreclosure process. Ho sends a signal to the industry that the courts might not always agree with how the CFPB views debt collection.

Case Status
The case is ongoing, and the appellant is seeking a petition for panel rehearing before the Ninth Circuit. It wouldn’t be surprising to see this issue before the U.S. Supreme Court in the future.

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