The Ninth Circuit Holds that the Enforcement of a Security Interest is Not Always “Debt Collection” Subject to the Fair Debt Collection Practices Act

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The United States Court of Appeals for the Ninth Circuit recently held that a lender’s agent is not a “debt collector” within the meaning of the Fair Debt Collection Practices Act (“FDCPA”) when it sends certain notices to the borrower in connection with a non-judicial foreclosure. Ho v. ReconTrust Co., NA, 840 F.3d 618, 621 (9th Cir. 2016).

“Debt collectors” face civil damages if they engage in an act or omission prohibited by the FDCPA while attempting to collect debts. The statute defines “debt collector” as an entity that “regularly collects or attempts to collect, directly or indirectly, debts owed to or due or asserted to be owed or due [to] another.” 15 U.S.C. §1692a(6). A “debt” is defined as “an obligation . . . of a consumer to pay money.” 15 U.S.C. §1692a(5).

The dispute in Ho arose out of a loan issued to Ho, which was secured by a deed of trust, and involved three parties: Ho as the borrower, Countrywide Bank as the lender and ReconTrust as the trustee (acting as an agent for both the borrower and the lender, but also authorized to sell the property in the event of borrower default). Ho defaulted on her loan payments. As a result, ReconTrust initiated a non-judicial foreclosure by mailing and recording a notice of default and a notice of sale as required by state law. Ho sued ReconTrust alleging that it violated the FDCPA by sending her notices that misrepresented the amount of debt she owed.

Ho argued that the notices qualified as debt collection in that “they pressured her to send money to Countrywide” to avoid foreclosure. By sending the notices, Ho argued, ReconTrust attempted to collect a debt, and as a result, was a “debt collector” subject to the FDCPA provisions.

The Ninth Circuit appellate panel disagreed. Relying on 15 U.S.C. §1692a(5), the Court first pointed out that the “FDCPA imposes liability only when an entity is attempting to collect debt.” As the Court explained, the “object of a non-judicial foreclosure is to retake and resell the security, not to collect money from the borrower.” The Court also noted that there is no deficiency action allowed under California law following a non-judicial foreclosure, and therefore “the foreclosure extinguishes the entire debt even if it results in a recovery of less than the amount of the debt.” The Court concluded that “actions taken to facilitate a non-judicial foreclosure, such as sending the notice of default and notice of sale, are not attempts to collect ‘debt’ as the term is defined by the FDCPA.” In doing so, the Court reasoned that “[f]ollowing a trustee’s sale, the trustee collects money from the home’s purchaser, not from the original borrower,” and “[b]ecause the money collected from a trustee’s sale is not money owed by a consumer, it isn’t ‘debt’ as defined by the FDCPA.” The Court held that ReconTrust did not, directly or otherwise, attempt to collect money from Ho but merely complied with the state law notice requirements governing non-judicial foreclosures.

The Ninth Circuit carefully explained, however, the nuances of its holding: “[w]e do not hold that the FDCPA intended to exclude all entities whose principal purpose is to enforce security interests” – rather, “[w]e hold only that the enforcement of security interests is not always debt collection.”

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