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Does the FDCPA protect consumers in non-judicial foreclosure?

The United States Supreme Court is scheduled to hear a case this term which will determine whether the Fair Debt Collection Practices Act (FDCPA) applies to non-judicial home foreclosures. Specifically, the case will examine the role of law firms seeking non-judicial foreclosure of residential homes, and whether they are ‘debt collectors’ under the law.

Judicial vs non-judicial home foreclosures

The U.S. Supreme Court will review a case decided by the United States Court of Appeals for the Tenth Circuit, which based its verdict on a similar case from the Ninth Circuit Court of Appeals. Here, the Tenth Circuit hinged its decision on the distinction between judicial and non-judicial home foreclosures. Because attorneys representing creditors in non-judicial home foreclosures do not recover a deficiency judgment against a homeowner, the Tenth Circuit ruled that they are not subject to the FDCPA rules. The Supreme Court will decide whether that is a valid interpretation of the law. 

Now, you are probably wondering about the difference between the two types of foreclosure actions. If a home is sold at a sheriff’s sale in a judicial, or court-supervised foreclosure action, and that sale fails to pay the loan issued by the bank in full, then the creditor may seek repayment of the remaining amount of the loan that the sale of the home did not cover. The amount sought from the borrower to repay the portion of the loan that remains in excess of the home’s worth is called a deficiency judgment.  A non-judicial foreclosure is still subject to certain rules, but it is not carried out in a court proceeding, and does not include deficiency judgments for the remainder of the loan. Each state is different. In Virginia, lenders may foreclose using either judicial or non-judicial processes.

Does ‘debt’ equal money owed?

The Tenth Circuit interpreted the word ‘debt’ as owing a creditor money, and because of the lack of a deficiency judgment, a non-judicial foreclosure does not seek repayment of a debt. The Tenth Circuit reasoned that because a law firm representing the bank seeks to sell the home and use the proceeds from a sheriff’s sale to satisfy the unpaid loan and does not seek the remaining amount from the borrower, then it is not considered to be collection of a debt subject to the FDCPA. Other federal courts of appeals have reached the opposite conclusion.

The U.S. Supreme Court will resolve a split between Circuit Courts

The United Supreme Court will decide a split between U.S. Circuit Courts in the case. The Court of Appeals for the Fourth, Fifth, and Sixth Circuits have decided that non-judicial home foreclosures are subject to the FDCPA, because the foreclosure seeks to recover the value of a loan granted to purchase a home or otherwise recover money secured by property. In other words, the money is provided to a borrower but the lender retains the right to recapture and sell the property to repay the loan if payments are not made. These courts have found that it is still an action to recover a past due debt, regardless of whether a deficiency judgment is sought for any remaining amount after the sale of the home.

Either way, the Supreme Court’s decision in this case will impact the behavior of law firms representing creditors during home foreclosures, hopefully by increasing protections for consumers.