Punctual Leadership Blog

Title and Real Property

Supreme Court Rules on Foreclosure Law Firms, Debt Collection Laws

by Punctual Abstract

When Dennis Obduskey defaulted on the mortgage loan that was secured by his house, his lender hired law firm McCarthy & Holthus, LLP, who sent a letter to Obduskey. The letter indicated that they were commencing a non-judicial foreclosure of the property.

Obduskey requested that the law firm provide him with verification of the debt, a requirement under the Fair Debt Collection Practices Act (FDCPA), which is designed to protect consumers from aggressive debt collection practices. If applicable, the FDCPA would require McCarthy & Holthus cease collection until it had obtained verification of the debt.

But foreclosure law firms aren’t debt collectors, so McCarthy & Holthus ignored Obduskey’s request and initiated a non-judicial foreclosure by filing with the county trustee a demand and notice of eviction. Obduskey countered with a lawsuit alleging that the firm had violated the FDCPA.

Did Obduskey know something foreclosure law firms like McCarthy & Holthus didn’t about the scope of the FDCPA?

According to the U.S. District Court and the Court of Appeals for the Tenth Circuit, no — Foreclosure law firms carrying out non-judicial residential foreclosures are not subject to  FDCPA rules because they are not defined as debt collectors within the meaning of the FDCPA.

Still, the case was appealed to the Supreme Court — which then ruled unanimously that foreclosure law firms and other parties who seek no more than to enforce security-interest do not  fall within the scope of “debt collector,” as it is defined in the FDCPA.

Though the court acknowledged that non-judicial foreclosure proceedings do constitute an attempt to collect a debt, Congress intentionally worded the FDCPA to treat security-interest enforcement differently from ordinary debt collection.

As a case in point, the FDCPA strictly prohibits debt collectors from communicating with third parties, but advertising foreclosure sales is a routine part of a non-judicial foreclosure proceedings.

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