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SCOTUS says FDCPA does not apply to nonjudicial foreclosure

We posted a blog previously about an important consumer protection case pending before the U.S. Supreme Court. We explained that the issue was whether the Fair Debt Collection Practices Act — the main federal law extending legal protections against abusive debt collectors to consumers — applied to a Colorado law firm that had initiated a nonjudicial foreclosure.

In that post, we covered the issues in Obduskey v. McCarthy & Holthus LLP in detail as related to the FDCPA and whether a party is a debt collector that is governed by the Act’s provisions, including being subject to a suit for money damages by a consumer who was the victim of illegal collection practices.

Unanimous opinion

On March 20, the Supreme Court released its opinion, holding 9-0 that a party that initiates nonjudicial (outside of the court process) residential foreclosure is not a debt collector under the FDCPA, but is still subject to narrower provisions of the Act regulating entities that enforce security interests.

(For our Virginia readers, it is important to know that both judicial and nonjudicial foreclosures are available in our state.)

What is a debt collector?

The court said that while the law firm at issue was enforcing a security interest in the mortgage, making it subject to certain limited FDCPA provisions, it was not subject to the full range of regulation on debt collector activities because it did not meet the main definition of “debt collector” in the Act.

The primary definition says that a debt collector is someone whose principal business is to collect debts or who regularly “directly or indirectly” attempts to collect debts. The law defines a “debt” as a consumer obligation to pay for a transaction involving “personal, family, or household purposes.”

The court went through a detailed examination of the exact language of the statute and the legislative history of the law to determine that just because an entity falls under the security interest provision does not mean it is a debt collector for all purposes of the law.

It also explained that Congress appeared to have reached a compromise to treat security interest enforcers differently.

Therefore, the court concluded that the law firm in Obduskey by only engaging in security interest enforcement when it took steps to initiate a nonjudicial foreclosure on a home did not fall under the primary definition of debt collector and was not regulated in that activity by the full force of the FDCPA, only by the limited provisions governing security interest enforcement.

Interestingly, both the full court in its opinion and Justice Sotomayor in her concurrence note that Congress can modify the FDCPA if it disagrees with the court’s interpretation.