On Oct. 19, 2016, the Ninth Circuit held that merely enforcing a security interest is not “debt collection” under the federal Fair Debt Collection Practices Act (“FDCPA”). In so holding, the Ninth Circuit disagreed with earlier decisions by the Fourth and Sixth Circuits, creating a split that might eventually be resolved by the U.S. Supreme Court.
In Ho v. ReconTrust Co., NA., a borrower sued ReconTrust and Countrywide, claiming they violated federal law in pursuing foreclosure after she defaulted on her loan. In particular, the borrower alleged that ReconTrust violated the FDCPA by sending her default notices stating the amounts owed. The district court dismissed that claim, finding the trustee was not a debt collector engaged in debt collection under the FDCPA.
On appeal, the Ninth Circuit affirmed the dismissal. In an opinion by Judge Kozinski, the Court observed that a notice of default and a notice of sale may state the amounts due, but they do not demand payment. And in California, deficiency judgments are not permitted after a non-judicial foreclosure sale, so no money can be collected from the homeowner.
While default notices may “induce” a borrower to pay off a debt, the Ninth Circuit noted that such inducements arose from the existence of the lien. As Kozinski put it: “The fear of having your car impounded may induce you to pay off a stack of accumulated parking tickets, but that doesn’t make the guy with the tow truck a debt collector.”
Accordingly, enforcing a security interest does not fall within the general definition of “debt collection” under the FDCPA, which means lenders and trustees are not subject to the statute’s general prohibitions on debt collectors. Rather, enforcing a security interest falls within the narrow purview of 15 U.S.C. § 1692f(6), which only prohibits the taking, or threatening to take, non-judicial action to dispossess a consumer of his or her property when there is no right or intent to do so.
The Court’s ruling is important as the notices complained of in Ho are required by California law prior to exercising the right of non-judicial foreclosure. A lender’s right to enforce a security agreement would be frustrated if the FDCPA were read to bar lenders from complying with California notice requirements. Such a ruling could have effectively ground foreclosures in the state to a halt.