Congress passed the Fair Debt Collection Practices Act (FDCPA) in 1977 following a wave of reports of perceived abuse in the consumer debt collection industry. The purpose, of course, was not only to punish the unscrupulous, but also to level the playing field for those debt collectors operating fairly, thus eliminating whatever competitive advantage the unscrupulous might otherwise have enjoyed.
Thirty-seven years later, courts (and litigators) continue to explore the limits of the kinds of activities the FDCPA precludes, oftentimes with inconsistent results. These inconsistencies have resulted in varying interpretations of the FDCPA’s coverage, creating a kind of patch-work across jurisdictions. For those businesses involved with consumer financial services nationally, or at least regionally across states and federal circuits, this can result in the daunting challenge of figuring out whether the FDCPA applies to your activity.
One area that has seen a surge in recent court decisions is the potential FDCPA liability of mortgage servicers when foreclosing on a mortgage or other security interest. That is, does the FDCPA apply generally to the enforcement of security interests in addition to traditional debt collection practices? Some courts regard foreclosing on a secured property interest as outside the ambit of the FDCPA, while others look to the ultimate purpose of the foreclosure – repayment of a loan – as implicating the very concerns underpinning the act. Behind these inconsistent court decisions is not only the fact that certain of the FDCPA’s key provisions are rather vague, but, more fundamentally, a patent tension between the broad ameliorative goals of the FDCPA and a statutory text that is quite limited in scope.
This article looks at a few of the key recent decisions in this burgeoning area of FDCPA claims in the context of foreclosures, as well as the Consumer Financial Protection Bureau’s (CFPB) position on this issue.
As with most statutes, the key to determining whether the FDCPA applies to a given party or conduct lies in the definitions, which courts scrutinize closely in analyzing its application to foreclosures. The FDCPA only applies to “debt collectors,” and the proscribed action or communication must be made as part of an attempt to collect a debt. The act defines “debt collector” as “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” (15 U.S.C. § 1692a(6).) The act thus excludes creditors, and generally only applies to third-party debt collectors.
Further, to be a “debt collector,” one’s principal purpose of business must be debt collection, or one must simply “regularly” engage in debt collection. Needless to say, a lot of litigation has revolved around whether a particular entity is “regularly” engaged in debt collection.
The FDCPA is not silent with respect to the enforcement of security interests, as it provides that for purposes of a specific sub-section of the FDCPA (Section 1692f(6)), the term “debt collector” also includes “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests.” Therefore, the FDCPA clearly regulates enforcers of security interests for purposes of compliance with Section 1692f(6); the question that has divided courts is whether the other provisions of the FDCPA that proscribe certain activity “in connection with the collection of any debt” apply to enforcers of security interests to the same degree as traditional debt collection activity.
Also important in the context of foreclosures is the definition of “debt,” which the act defines broadly as “any obligation” a consumer incurs to pay for personal, family, or household expenses. (15 U.S.C. § 1692a(5).) Again, despite the seeming simplicity of these definitions, courts have struggled applying them to the myriad of entities and relationships at play in the consumer financial services industry.
The fact that the FDCPA includes a fee-shifting provision, allowing successful plaintiffs to recover their fees and costs incurred in prosecuting the action, means that FDCPA actions have enjoyed a kind of renaissance with the downturn in the economy in 2008, despite the rather modest statutory damages that are available (capped at $1,000 per violation).
A Thicket of Litigation
Perhaps not surprisingly, the recent wave of FDCPA litigation has resulted in an array of interpretations as to whether the FDCPA applies generally to entities that are pursuing foreclosure actions.
The FDCPA Covers Foreclosure of Security Interests
Most recently, the Sixth Circuit stepped into the fray in a widely-anticipated decision, in which it held mortgage foreclosure is debt collection within the meaning of the FDCPA. (Glazer v. Chase Home Finance LLC, 704 F.3d 453 (6th Cir. 2013).)
In Glazer, the plaintiff brought a FDCPA claim against Chase Home Finance and the law firm hired by Chase to foreclose on his property. Mr. Glazer asserted that Chase (and its attorneys) had violated the FDCPA by, among other things, falsely stating in a foreclosure complaint that Chase owned the note and mortgage, when he claimed it did not. The district court granted the defendants’ motions to dismiss for failure to state a claim under the FDCPA. However, Mr. Glazer appealed and found a more receptive audience in the Sixth Circuit.
While the Sixth Circuit affirmed the district court’s dismissal of Mr. Glazer’s claims against Chase, finding that Chase was not a “debt collector” because Chase obtained the mortgage loan prior to the loan going into default, it reversed the district court’s dismissal of Mr. Glazer’s FDCPA claim against Chase’s foreclosure counsel. The key question for the Sixth Circuit was whether mortgage foreclosure constitutes debt collection under the FDCPA.
The court first expressed some obvious frustration with the statutory definitions of “debt” and “debt collector,” lamenting that while the concepts “may seem straightforward enough,” considerable confusion has arisen, despite the fact that these concepts are “pivotal” to the operation of the act. Starting with the text of the act, the court explained that whether an obligation is a “debt” within the meaning of the act depends not on whether it is secured, but rather on the purpose for which it was incurred (i.e., primarily for personal, family, or household purposes). As such, a home loan, even if secured, is a “debt” within the meaning of the FDCPA. Moreover, the court construed the act as defining broadly what it considers debt collection, including conduct or communications in the course of a legal proceeding (i.e., foreclosure).
The court bolstered its conclusion by explaining that “every foreclosure, judicial or otherwise, is undertaken for the very purpose of obtaining payment on the underlying debt, either by persuasion (i.e., forcing a settlement) or compulsion (i.e., obtaining a judgment of foreclosure, selling the home at auction, and applying the proceeds from the sale to pay down the outstanding debt). Clearly, the court concluded, the purpose of foreclosing on property is to obtain payment on an outstanding debt, and therefore plainly must fall within the purview of the FDCPA.
The Sixth Circuit was not the first court to so rule, as the Fourth Circuit, in 2006, had ruled on similar grounds, rejecting a foreclosure law firm’s argument that foreclosure under a deed of trust is not the enforcement of an obligation to pay money, and finding that the FDCPA encompasses such activity. (See Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 376 (4th Cir. 2006).)
The FDCPA Does Not Cover Foreclosure of Security Interests
A very recent decision from the U.S. District Court for the Eastern District of New York came to the opposite conclusion. In Boyd v. J.E. Robert Co., 2013 WL 5436969 (E.D.N.Y. Sept. 27, 2013), a group of plaintiffs filed a putative class action alleging violations of various provisions of the FDCPA. The court granted the defendants’ motions for summary judgment, finding that (1) tax liens are not “debts” within the meaning of the FDCPA, and (2) the foreclosure of such liens does not constitute “debt collection” within the meaning of the FDCPA. Because the foreclosure related to the tax liens was solely an action against the property, and did not request a deficiency judgment, there was no “debt collection” activity as the conduct was only the enforcement of security interests. Plaintiffs filed a motion for reconsideration, which the court denied, ruling firmly that foreclosure activities are not debt collection. The court characterized an amicus brief filed by the CFPB, along with the Sixth Circuit’s decision in Glazer and other authority, as replete with “misguided reasoning,” which it refused to adopt. Instead, the court adopted the statutory interpretation set forth by the District of Minnesota, which had reached the same result. See Gray v. Four Oak Court Association, 580 F. Supp. 2d 883 (D. Minn. 2008). In Gray, the court explained,
The FDCPA does not define ‘the collection of any debt.’ However, the statute’s definition of a ‘debt collector’ clearly reflects Congress’s intent to distinguish between ‘the collection of any debts’ and ‘the enforcement of security interests.’ 15 U.S.C. § 1692a(6). The first sentence of that definition defines a debt collector as “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” Id. § 1692a(6). The third sentence of § 1692a(6) provides that for purposes of § 1692f(6), a debt collector is also ‘any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests.’ If a party satisfies the first sentence, it is a debt collector for purposes of the entire FDCPA. See Kaltenbach, 464 F.3d at 529. If a party satisfies only the third sentence, its debt collector status is limited to § 1692f(6). However, if the enforcement of a security interest was synonymous with debt collection, the third sentence would be surplusage because any business with a principal purpose of enforcing security interests would also have the principal purpose of collecting debts. Therefore, to avoid this result, the court determines that the enforcement of a security interest, including a lien foreclosure, does not constitute the ‘collection of any debt.’
Similarly, the Tenth Circuit addressed this very issue in ruling on a mortgage servicer’s motion to dismiss in Burnett v. Mortgage Electronic Registration Systems, Inc., 706 F.3d 1231 (10th Cir. 2013). Burnett had argued that she had stated claims under the FDCPA for conduct related to the foreclosure of her property. The Tenth Circuit appeared to disagree, acknowledging that while the “initiation of foreclosure proceedings may be intended to pressure the debtor to pay her debt,” “when a debt has yet to be reduced to a personal judgment against a mortgagor, a non-judicial foreclosure does not result in a mortgagor’s obligation to pay money – it merely results in the sale of the property subject to a deed of trust.” While the court did not ultimately decide the issue, as it granted the motion to dismiss solely on the grounds that Burnett had not pleaded sufficient facts, it appeared to show its cards by highlighting the competing tensions in determining whether mortgage foreclosure conduct can subject parties to FDCPA liability.
The CFPB Enters the Ring
Predictably, in its court filings, commentaries to its final “larger participant” rule, and other publications, the CFPB promotes an expansive interpretation of the FDCPA advocating that the enforcement of security interest should qualify as conduct relating to debt collection. The CFPB acknowledges that under the FDCPA’s general definition of “debt collector” (see 15 U.S.C. § 1692a(6)), a person who only enforces a security interest and does not seek payment of money, does not necessarily qualify as a debt collector. At the same time, however, the CFPB’s position is that when a person seeks payment of money and enforces a security interest, that person can qualify as a debt collector.
For example, in one of its first amici briefs ever filed, the CFPB argued that a mortgage servicer that engages in debt collection during foreclosure should be considered a “debt collector” and that such conduct should be construed as relating to debt collection as defined under the FDCPA. (See Amicus Brief filed in Birster v. American Home Mortgage Servicing, Inc., 481 Fed. Appx. 579 (11th Cir. July 18, 2012).) Specifically, the CFPB argued that the district court erred when it dismissed the action on the basis that the mortgage servicer did not qualify as a debt collector and that its conduct did not relate to collection.
In Birster, two consumers brought FDCPA claims against a mortgage servicer claiming that the mortgage servicer made repeated harassing and threatening phone calls to induce them to pay their mortgage debt in order to avoid foreclosure. The district court rejected the consumers’ claims, holding that they failed as a matter of law because the alleged conduct related to the enforcement of a security interest and, as a result, was not debt collection activity covered by the FDCPA. The district court also seemed to conclude that the mortgage servicer qualified as a “debt collector” only for the limited purpose under Section 1692f(6), not the entire FDCPA. The CFPB filed its amicus brief in which it advocated for a more expansive interpretation of the FDCPA; namely, that a party attempting to collect money during foreclosure qualifies as a “debt collector” under the general definition of the FDCPA, (see 15 U.S.C. § 1692a(6)), and that such conduct relates to debt collection.
The CFPB acknowledged that Section 1692a(6) “suggests that the enforcement of a security interest, standing alone does not qualify as debt collection.” However, the CFPB argued that “[n]othing in the FDCPA’s text suggests that attempting to obtain payment of a debt ceases to qualify as debt collection if it occurs in the context of foreclosure.” Further, the CFPB disagreed with some courts’ rulings which suggested that enforcers of security interests qualify as “debt collector” only for the limiting purpose of Section 1692f(6), which bars collectors from “taking or threatening to take nonjudicial action to effect dispossession or disablement of property” if they are not legally entitled to do so. The CFPB maintained that an entity that enforces a security interest might also regularly collect debts and, therefore, meet the general definition of “debt collector.” As a result, such an entity meets the definition of “debt collector” under Section 1692a(6) and qualifies as “debt collector” for purposes of the entire FDCPA, even if its principal purpose is enforcing security interests and even if it is enforcing a security interest in that particular case.
The CFPB also maintained that an attempt by the enforcer of a security interest to obtain payment of debt during foreclosure constitutes a debt collection conduct as defined under the FDCPA. The CFPB reasoned that debt collectors “regularly initiate foreclosure proceedings and then advise debtors to pay a specified amount to avoid foreclosure. “Such communications,” the CFPB argued, “both move toward foreclosure and seek to obtain payment of a debt, they relate both to enforcement of a security interest and to collection of a debt.” Therefore, based on the CFPB’s reading of the statute, seeking payment of money from a debtor qualifies as debt collection conduct even if the debt collector seeks to enforce a security interest in a foreclosure proceeding at the same time.
The Eleventh Circuit agreed with the CFPB’s position. In Birster, the court concluded that the mortgage servicer’s conduct supported the conclusion that it engaged in debt collection activity. Similarly, in Reese v. Ellis, Painter, Ratterree & Adams, LLP, 678 F.3d 1211 (11th Cir. 2012), the court adopted the CFPB’s position almost wholesale by holding that an entity involved in the enforcement of a security interest can constitute a “debt collector” subject to the entire FDCPA if it regularly collects or attempts to collect debts. The court also found that demanding a payment of money qualifies as debt collection subject to the FDCPA even if the demand relates to foreclosure proceeding.
Following Birster and Reese, the CFPB reiterated its expansive interpretation of the FDCPA as part of its final “larger participant” rule on consumer debt collection. (See 12 C.F.R. 1090 et seq.) In its commentary to the rule, the CFPB declared that the FDCPA could apply to foreclosure proceedings. While it recognized that the enforcement of the security interest alone is insufficient to constitute debt collection, the CFPB stated that “when a person both seeks payment of money and enforces a security interest, that person can qualify as a debt collector for purposes of the Final Consumer Debt Collection Rule.” Likewise, in its 2013 Annual Report on the FDCPA, the CFPB repeated this interpretation of the statute and its discontent with some courts’ refusal to apply the statute in the foreclosure context According to the CFPB, a narrow interpretation of the statute leaves “consumers vulnerable to harmful collection tactics as they fight to save their homes from foreclosure.”
While it is obviously important for those engaged in the enforcement of security interests to be aware of whether their specific conduct is subject to the FDCPA, even in those jurisdictions where the FDCPA does not apply to foreclosure activity alone, this general rule is of course modified to the extent enforcers of security interests seek deficiency judgments personally against defendants or otherwise make demands for payment in the course of the foreclosure proceedings, which often go hand-in-hand with foreclosure. That is, operating in a jurisdiction in which the FDCPA does not apply to security enforcement actions does not mean that one is insulated from the FDCPA for other actions taken in the course of enforcement that clearly are within the reach of the FDCPA. There is, therefore, no safe harbor, and thus all communications, demands, and other actions taken in the course of enforcing a security interest should be undertaken with the assumption that the FDCPA applies.
The U.S. District Court for the Southern District of Indiana summarized the distinction succinctly in Overton v. Foutty & Foutty, LLP, 2007 WL 2413026, *6 (S.D. Ind. Aug. 21, 2007), explaining that: “If a person invokes judicial remedies only to enforce the security interest in property, then the effort is not subject to the FDCPA [other than the specific provision subject to security enforcement]. But if the person is also seeking additional relief, such as a personal judgment against the borrower, then the FDCPA applies.” See also Birster v. Am. Home Mortg. Servicing, Inc., 481 Fed. Appx. 579 (11th Cir. 2012) (explaining that simply because one seeks to enforce a security interest does not make one immune from the FDCPA, as entities often seek to enforce security interest and collects debts in the same action).
Part of the apparent inconsistency in the results courts have reached is no doubt due to the fact that courts have answered these questions in the context of specific and oftentimes unique factual contexts, leading them to ask (and answer) different questions. Of course, any party engaged in the enforcement of security interests should be aware of the potential for the FDCPA to cover their conduct and should proactively implement policies and procedures to ensure that their actions do not lead to burdensome and costly FDCPA compliance issues down the road.