FDCPA Applied to Foreclosure Actions

The Courts have ruled that the Fair Debt Collection Practices Act (FDCPA) does not apply to actions that merely seek to foreclose a lien on a security interest.  But, when the analysis of when the foreclosure of a lien becomes an effort to collect a debt is looked at, it becomes apparent that most foreclosure efforts will actually be viewed as debt collection, thereby invoking the requirements and formalities of the FDCPA.

The issue was addressed in PETTWAY v. HARMON LAW OFFICES, P.C., 2005 WL 2365331 (D. Mass.). In PETTWAY the consumer alleged that, “the form letter that [the debt collector] uses to transmit payoff and reinstatement terms to homeowners…systematically overstates the amount [due].”  In the action the debt collector moved for summary judgment contending that the FDCPA did not apply to his actions because, “its business is not collecting debts, but rather perfecting client security interests.”

In its analysis the court in PETTWAY reconciled two lines of cases that disagreed as to whether the FDCPA applies to foreclosure actions.  In BEADLE v. HAUGHEY, 2005 WL 300060 (D.N.H. Feb. 9, 2005), relied on by the debt collector, the Court held that, “a mortgage forclosure is not governed by the FDCPA because a foreclosure is not a debt collection practice, but instead a legal action undertaken to return property to its rightful owner.  Security enforcement activities fall outside the scope of the FDCPA because they aren’t debt collection practices.”  BEADLE quoting ROSARIO v. TAYLOR, 324 F. Supp. 2d 917, 924 (N.D.Ind. 2004).

The consumer relied on SHAPIRO AND MEINHOLD v. ZARTMAN, 823 P. 2d 120 (Colo. 1992).  SHAPIRO held that, “[s]ince a foreclosure is a method of collecting a debt by acquiring and selling secured property to satisfy a debt, those engaged in such foreclosures are included within the definition of debt collectors…”

The PETTWAY Court decided that the BEADLE and SHAPIRO cases were not inconsistent with each other.  The Court ruled that in cases where the foreclosure action is only “tangentially” related to payment of the underlying debt that BEADLE did control and the FDCPA did not apply.  However, the Court continues,BEADLE and similar cases do not preclude the possibility that law firms whose foreclosure activities include efforts to compel the payment of the underlying debt might be liable under the FDCPA.

Seeking to foreclose a security interest in addition to seeking to collect moneys owed does not shield a collector from liability.  In fact the court reasoned that the FDCPA would be invoked if the firm merely sought to collect costs in connection with the foreclosure, including legal fees.  This ruling creates the circumstance alluded to above where the range of foreclosure actions to which the FDCPA does not apply is minimal.

In a footnote the PETTWAY Court provides the moral to this story.  “…law firms should stay out of the debt collection business and debt collection agencies should not attempt to hold themselves out as law firms.”


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