On March 20, 2019, the Supreme Court handed down its decision in Obduskey v. McCarthy & Holthus, which sought to end a debate about whether the enforcement of security interests by non-judicial foreclosure is considered “debt collection” within the meaning of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §1692 et seq. Justice Breyer, writing for a unanimous court, upheld the lower courts’ determinations that the foreclosing law firm in a non-judicial foreclosure was doing “no more than” enforcement of a security instrument and was thus not a covered “debt collector.” Although the Justice’s conclusion is based on a straight forward textual analysis, it is overly academic, detached from the realities of debt collection, and misses the obvious intent of this important consumer protection law.
The FDCPA defines a debt collector as “any person … in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts.” 15 U.S.C. §1692a(6). The Justices agree that this primary definition would clearly cover law firms seeking to enforce a foreclosure claim, judicially or non-judicially, were it not for a single clause at the end of the definition: “[f]or the purpose of section 1692f(6) of this title, such term also includes any person … in any business the principal purpose of which is the enforcement of security interests” (emphasis added). The Court concludes that non-judicial foreclosures seek only to enforce a bank’s security interest in the mortgaged home, and so this “limited-purpose definition” applies to law firms engaged in non-judicial foreclosures. Thus, the majority of the provisions of the FDCPA no longer apply to law firms foreclosing on homes in non-judicial foreclosure states. The Court does not, however, extend this ruling to judicial foreclosures; foreclosing law firms in judicial foreclosure states remain subject to all the provisions of the FDCPA.
In Obduskey, the Court creates a legal fiction in which—for the purpose of the FDCPA—non-judicial and judicial foreclosure operate differently. In theory, the two foreclosure schemes serve different purposes. The Court notes that foreclosure in non-judicial states provides no means to obtain a deficiency judgment: if the non-judicial auction does not satisfy the total debt, the creditor must file an action in court to collect the remainder. Thus, a non-judicial foreclosure is not a means to collect the balance due on the debt, but rather is only recoupment of the security interest. By contrast, in judicial foreclosure states such as New York, filing a court action against the homeowner calls the entire amount of the debt due. In this way, a judicial foreclosure serves as a demand for money and remains a collection of debt within the meaning of the primary definition in the FDCPA. Judicial foreclosure also provides a mechanism for deficiency judgments within the foreclosure litigation itself, enabling collection of amounts remaining after a foreclosure auction. The FDCPA, and Justice Breyer’s interpretation of it, depends on this distinction to treat debt collectors enforcing mortgages differently in these two regimes.
In reality, though, this distinction does not create significant differences in the practice of foreclosures. Homeowners in either type of jurisdiction experience foreclosure similarly: debt collection with the risk of losing one’s home. To a consumer, creditors–via their law firm-agents–are seeking to enforce a home loan debt, regardless of whether a deficiency judgment can be obtained within the same procedure or requires a separate and subsequent filing.
This dichotomy of judicial and non-judicial foreclosures undermines the FDCPA’s very goal. The statute’s declared purpose is “to eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses.” This purpose should serve as a context for the Court’s analysis, and yet is surprisingly lacking from the Obduskey opinion. Similarly situated homeowners in Colorado and New York should each enjoy federal protections against abusive debt collectors. However, post-Obduskey, they don’t. Now, a Colorado homeowner has no claim against conduct for which a New Yorker has a right of action. According to the Court in Obduskey, about half of the states are non-judicial foreclosure jurisdictions. In seeking to resolve a circuit split as to the application of the FDCPA, the Court created an even more patchwork and rigid split between judicial foreclosure and non-judicial foreclosure states.
Justice Sotomayor wrote a separate concurrence essentially begging Congress to “clarify the statute if we have gotten it wrong.” Debt collection is debt collection, no matter the forum, and the FDCPA was intended to protect consumers from all forms of abusive debt collection practices. Obduskey creates a world in which a consumer’s protections under a federal law depend on where they live, despite the FDCPA’s attempt to “promote consistent” consumer protections. Homeowners should have the Act’s broad protections in every state. As Justice Sotomayor notes, “[T]he initiation of a foreclosure itself sends a clear message: ‘[P]ay up or lose your house.’”
Winston Berkman-Breen is Staff Attorney/Justice Catalyst Fellow, and Julie Anne Howe is Senior Staff Attorney, at the New York Legal Assistance Group, Consumer Protection Unit.