Currently, some courts allow borrowers to bring Fair Debt Collection Practices Act claims for non-judicial foreclosures while other courts do not, but that is about to change. On June 28, the Supreme Court agreed to hear the appeal of Dennis Obduskey, a Colorado borrower arguing that the FDCPA should apply to non-judicial foreclosures.
In the Tenth Circuit’s decision, a borrower sued his mortgage servicer and McCarthy & Holthus LLP, the law firm hired to process the non-judicial foreclosure, for failing to comply with certain requirements of the FDCPA. Specifically, Obduskey alleged that the law firm failed to respond to his request for a validation of the debt. The Tenth Circuit held that Wells Fargo was not a debt collector under the FDCPA since it began servicing the loan before it went into default. That holding will stand and will not be heard by the Supreme Court.
Significantly, the Tenth Circuit further held that the law firm was not a debt collector under the FDCPA because non-judicial foreclosure proceedings are not covered by the FDCPA. In doing so, the Tenth Circuit sided with the Ninth Circuit, holding that compliance with the FDCPA is not required during non-judicial foreclosure proceedings, contrary to the position of the Fourth, Fifth, and Sixth Circuits. This is the holding that the Supreme Court will consider.
The Tenth Circuit explained that its reasoning was based on its interpretation of the FDCPA, but went further and explained that permitting FDCPA claims for non-judicial foreclosures creates a compliance dilemma for firms like the one in this case. For example, direct communications to a borrower represented by an attorney would be prohibited by the FDCPA but required by Colorado statute. Similarly, communications to third parties would be banned by the FDCPA but required by Colorado statute.
While many states require judicial foreclosures, a majority of states permit non-judicial foreclosures. Non-judicial foreclosures may proceed pursuant to a power of sale clause in the loan agreement. The borrower is given due notice and the auction takes place, without court oversight. Given the large number of non-judicial foreclosures that take place nationally, this Supreme Court ruling will have a far-ranging effect.
In conclusion, the Supreme Court’s holding in Obduskey will significantly change the law while creating consistency across the country as to whether the FDCPA applies to non-judicial foreclosures. FDCPA compliance includes ceasing communications with the borrower on request and providing debt validation letters to the borrower on request, among other things. Penalties for violations can include up to $1,000 in statutory damages per lawsuit, plus attorneys’ fees and costs.