The U.S. Supreme Court To Decide If Homeowners Can Bring FDCPA Claims In Non-Judicial Foreclosures

One of the key tools for stopping a non-judicial foreclosure is in jeopardy. The United States Supreme Court has agreed to hear an argument that could bar homeowners from using FDCPA claims to stop a non-judicial foreclosure.  

Now thousands of lawsuits challenging nonjudicial foreclosures using FDCPA claims are up for grabs. The Court will determine whether federal debt collection laws apply to out-of-court home repossessions.

The Supreme Court agreed to hear an appeal of a ruling from the Tenth Circuit Court of Appeals. The 10th COA that found that the FDCPA does not apply to non-judicial foreclosures.

The stakes of the case are high. It focuses on a narrow technical interpretation of the Federal Debt Collections Practices Act.

Homeowners in non-judicial states could lose their rights to bring FDCPA claims in foreclosures. 

Wells Fargo Wants To Stop Homeowners From Making FDCPA Claims

At the heart of the case is Wells Fargo. The embattled bank has been attempting to foreclose on Colorado resident Dennis Obduskey.

Wells Fargo was servicing the $330,000 mortgage issued to Obduskey by the long-defunct Magnus Financial. Obduskey defaulted on the loan in 2009. As a result, Wells Fargo attempted several unsuccessful attempts to push through a non-judicial foreclosure against him. Colorado is a non-judicial foreclosure state. It also has one of the fastest foreclosure turnaround times in the country.

Wells ultimately turned to debt collection law firm McCarthy & Holthus LLP after being thwarted by Obduskey for 6 years. 

Consequently, McCarthy & Holthus sent Obduskey a letter stating that it could be considered a debt collector that was beginning a nonjudicial foreclosure.

However, the firm did not include the amount of money that it was seeking to collect.

Obduskey sued both Wells Fargo and the law firm claiming this omission was a violation of the FDCPA. The law says that debt collectors have to inform borrowers how much they owe.

Obduskey sued and lost at the district court level. The Tenth Circuit COA said Obduskey had made sufficient FDCPA claims. However, the law did not apply to nonjudicial foreclosures.

Five Courts Give 2 Different Rulings. Can A Homeowner Bring FDCPA Claims In Foreclosure Cases?

The ruling put the Tenth Circuit at odds with the U.S. Courts of Appeals for the Third, Fourth, and Sixth Circuits. It also put it at odds with the state supreme courts of Alaska and Colorado.

The Ninth Circuit has also aligned with the Tenth Circuit’s reading of the FDCPA. The 9th COA also said the same thing in the October 2016 decision in Ho v. ReconTrustCo.

As a result, the split has provoked widespread confusion in courts nationwide. And it threatens to deprive consumers of FDCPA protections. 

Wells Fargo has asked to be included in the Supreme court proceedings even though they lost at the 10th District.

FDCPA Claims Hurt Lenders From Making Easy Money

The bottom line of this argument is about lenders making easy money. Non-judicial foreclosure costs lenders a fraction of judicial foreclosure. They also have less judicial oversight. 

This new FDCPA Claims argument is a very nuanced argument. The debt collector is asking if taking a home without asking the debtor to pay any money meets the FDCPA’s standard for collecting money.

The Ninth and Tenth Circuits say such proceedings do not fall under the FDCPA. Whereas the Third, Fourth and Sixth circuit Courts do.

Consumer advocates support the broader reading of the FDCPA backed by the majority of circuits.  They also worry that a business-friendly Supreme Court could open homeowners up to abusive practices.

Geoff Walsh, a staff attorney with the National Consumer Law Center, told Bloomberg Law:

It would really carve out a big exception for debt collectors that are enforcing mortgages. It would mean they could harass people. 

A win for McCarthy & Holthus and Wells Fargo could eliminate debt collection lawsuits as a threat to banks. It could also declassify collections firms that elect for nonjudicial foreclosures as debt collectors.

Wells Fargo is represented by Hogan Lovells LLP and Snell & Wilmer LLP. McCarthy & Holthus is represented by Williams & Connolly LLP.

The case is Obduskey v. McCarthy & Holthus LLP, U.S., No. 17-1307.