Mortgage Foreclosure Is Debt Collection under the FDCPA, Sixth Circuit Holds

by Ballard Spahr LLP
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Lawyers whose principal business is mortgage foreclosure or who regularly handle mortgage foreclosures are “debt collectors” subject to the Fair Debt Collection Practices Act, the U.S. Court of Appeals for the Sixth Circuit has ruled. In its decision, issued on January 14, 2013, the Sixth Circuit refused to follow cases that have held mortgage foreclosure is not debt collection under the FDCPA because it involves the enforcement of security interests.

The FDCPA generally defines a “debt collector” as a person whose “principal business” is debt collection or “who regularly collects or attempts to collect” consumer debts. The Act contains a provision that, under certain conditions, deems “taking or threatening to take any nonjudicial action to effect dispossession or disablement of property” an unfair practice.

For purposes of this provision, the FDCPA’s “debt collector” definition includes persons enforcing security interests when that is the principal purpose of their business. Some courts have relied on this additional definition to hold that lawyers engaged in mortgage foreclosure are only subject to the FDCPA for purposes of the unfair practice provision and are not otherwise “debt collectors.”

The Sixth Circuit concluded that the additional definition should not be read to exclude the enforcement of security interests from debt collection. Rather, it should be read to extend the coverage of the FDCPA’s unfair practice provision to persons whose only role in the collection process is the enforcement of security interests, such as repossession agencies and their agents. It found that “[a] lawyer principally engaged in mortgage foreclosure does not meet this criteria, for he must communicate with the debtor regarding the debt during the foreclosure proceedings, regardless of whether the proceedings are judicial or non-judicial in nature.”

In the Sixth Circuit’s view, any activity whose purpose is to obtain payment of a debt “is properly considered debt collection” and “every mortgage foreclosure, judicial or otherwise, is undertaken for the very purpose of obtaining payment on the underlying debt” (emphasis supplied).

The Sixth Circuit’s holding is consistent with decisions from other circuits that have found lawyers engaged in mortgage foreclosure can qualify as “debt collectors” under the FDCPA. Those circuits include the Second, Third, Fourth, and 11th Circuits.

The Consumer Financial Protection Bureau has made clear that it agrees with this interpretation. On January 2, 2013, the CFPB’s final rule defining larger participants of a market for consumer debt collection became effective. In its background discussion of the rule, the CFPB noted its agreement with cases holding that an attorney or other person who enforces security interests can qualify as a debt collector under the FDCPA. The Sixth Circuit’s decision could encourage the CFPB to examine law firms and other entities or persons that only handle mortgage foreclosures.

Ballard Spahr’s Consumer Financial Services Group has created a team of lawyers who can assist foreclosure firms with their preparation for those examinations. Members of the team have already conducted similar compliance reviews and mock CFPB audits for numerous collection firms, debt collectors, and debt buyers. In addition, lawyers in the Group regularly consult with their clients engaged in consumer debt collection on compliance with the FDCPA and state debt collection laws.

For more information, please contact Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com, John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com, Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com, or Mark J. Furletti at 215.864.8138 or furlettim@ballardspahr.com.

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