Foreclosure Proceedings: Does the Fair Debt Collection Practices Act Apply?

The intent of the Fair Debt Collection Practices Act (“FDCPA”), enacted in 1978, is to protect consumers from unfair or abusive debt collection tactics. The Act sets forth clear standards which debt collectors must follow and establishes rights of the consumer with regard to these communications and procedures. However, as recently determined by the US Court of Appeals for the Ninth Circuit, the FDCPA does not apply to foreclosure proceedings.

In Barnes vs Routh Crabtree Olsen P.C., the borrower filed a complaint in federal court alleging that the mortgage loan owner, loan servicer, and attorneys violated the FDCPA by failing to make required disclosures and then proceeding with illegal foreclosure actions. The court ruled in the loan owner’s favor, and that ruling was later upheld in appeal.

The decision came down to definitions of “debt collection” and “debt collector.” The Ninth Circuit noted, “[t]he crux of the parties’ dispute is whether the defendants’ pursuit of judicial foreclosure was a form of debt collection.” It then explained that the FDCPA’s definition of “debt” boiled down to “a consumer’s obligation to ‘pay money.’”

With regard to the definition of a “debt collector,” the Court found that “since the FDCPA defines ‘debt collector’ as someone ‘who regularly collects or attempts to collect … debts owed or due or asserted to be owed or due another[,] … an entity that collects a debt owed itself—even a debt acquired after default—does not qualify under this definition.”

As the Court reminds us, the FDCPA is designed to regulate those whose principal business is debt collection with regard to money owed by a consumer to a third party. By contrast, the enforcement of a security interest – such as a mortgage – does not qualify as an attempt to collect money from a debtor.

The borrower argued that the loan owner “crossed the line into debt collection by including in its foreclosure complaint a request for a money award.” However, the Court rejected that reasoning, saying that the request “served simply to identify the amount of the debt secured by the property, which authorized a sheriff’s sale to discharge that liability in the same manner as for a typical judgment debtor.”

In conclusion, the Court affirmed that “[a] judicial foreclosure proceeding is not a form of debt collection when the proceeding does not include a request for a deficiency judgment or some other effort to recover the remaining debt.”

For more information on foreclosure proceedings, contact the real estate attorneys at Larson & Solecki LLP.

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