Is Foreclosure Debt Collection?

Updated on August 3, 2022

Recently the Ninth Circuit Court of Appeal shed some light on homeowners/mortgagors who, pursuant to the federal Fair Debt Collection Practices Act (“FDCPA”), sue foreclosing lenders for unlawful debt collection.   Although the Ninth Circuit has definitively decided on this matter, unfortunately, case law is still unsettled for these types of actions.

For now, litigants in state courts can refer to the Ninth Circuit’s decision as good persuasive authority.  In Ho v. ReconTrust Company, NA, Judge Kozkinski held that under the FDCPA merely enforcing a security interest is not “debt collection.” (Ho v. ReconTrust Company, NA (2016) 840 F.3d 618, 624.)  However, even though the Ninth Circuit has taken a view on this issue, other circuits disagree.  (See Wilson v. Draper & Goldberg PLLC, 443 F.3d 373, 378-79 (4th Cir. 2006); Glazer v. Chase Home Finance LLC, 704 F.3d 453, 461 (6th Cir. 2013).) Thus, there is a circuit-split of opinion and perhaps the Supreme Court will settle this issue in the near future.

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Background of the Case

Ho v. ReconTrust Company consisted of a borrower suing several foreclosure firms after the borrower defaulted on her mortgage loan.  The borrower alleged that the defendant companies violated the FDCPA by sending her default notices stating the amounts owed.  (Ho v. ReconTrust Company, supra, at 620.)  The district court dismissed the borrower’s claim finding that the trustee was not a debt collector engaged in debt collection under the FDCPA.

Ninth Circuit’s Opinion

In affirming the district court’s dismissal, the Ninth Circuit ruled that the notices issued as part of the foreclosure process, that is, the notice of default and a notice of sale, “merely informed Ho that the foreclosure process had begun, explained the foreclosure timeline, apprised her of her rights and stated that she could contact Countrywide (not ReconTrust) if she wished to make a payment.”  (Id. at 623. (Emphasis added.).)  In fact, the Court observed that these notices were intended to protect the debtor.  (Id.)   Notably, the Court emphasized that the notices are “entirely different from the harassing communications that the FDCPA was meant to stamp out.” (Id.)

Furthermore, “the object of a nonjudicial foreclosure is to retake and resell the security, not to collect money from the borrower. California law does not allow for a deficiency judgment following non-judicial foreclosure.”  (Id. at 621.)  Lastly, there is the inescapable truth that the notices complained of are required by California law prior to exercising the right to non-judicial foreclosure sale. (Id. at 622.)  Based on this analysis, the Ninth Circuit held that enforcing a security interest is not debt collection under the FDCPA.

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Accordingly, for now, until the Supreme Court rules on the matter, moving forward this opinion serves as good persuasive authority.

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