The Ninth Circuit Court of Appeals, in a split decision subject to a dissent, has held that the trustee under a California deed of trust does not, by performing the statutory foreclosure requirements, become a “debt collector” subject to the federal Fair Debt Collection Practices Act (FDCPA). The decision in Ho v. ReconTrust Company, NA, 840 F.3d 618 (9th Cir. 2016) is still subject to being reconsidered en banc, i.e., by an expanded panel of eleven Ninth Circuit judges. If it is not altered by the Ninth Circuit en banc, the decision will likely be the subject of a petition for review by the United States Supreme Court. If the decision sticks, California trustees have achieved a major victory protecting them from suit by borrowers under the FDCPA.
Ms. Ho financed the purchase of her home in Long Beach with a $548,000 loan from Countrywide Bank in 2007. In March, 2009 ReconTrust (a subsidiary of Bank of America) commenced foreclosure by recording a Notice of Default. In July, 2009 ReconTrust published a Notice of Trustee’s Sale.[1]
Ms. Ho filed an action in the United States District Court for the Central District of California naming as defendants ReconTrust, Countrywide and the loan servicer, predecessor by merger to Bank of America.[2] Ms. Ho alleged that the NOD and the NOTS contained inaccurate amounts for the debt and the arrearage. Ms. Ho alleged that ReconTrust was a “debt collector” as defined by FDCPA, and had violated the FDCPA’s prohibition against the use of “false, deceptive or misleading representation[s].” 15 U.S.C. § 1692e(2)(A).
Ms. Ho’s claim that ReconTrust was a “debt collector” under FDCPA was based on the argument that because the NOD and NOTS “threatened foreclosure unless [she] brought her account current, she reasonably viewed those documents as an inducement to pay up.”[3] In support, the lawyers for Ms. Ho cited two cases from sister circuits: Glazer v.Chase Home Fin. LLC, 704 F.3d 453, 461 (6th Cir. 2013) and Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 378–79 (4th Cir. 2006). Both Wilson and Glazer held that the defendants, who were each lawyers retained to foreclose a mortgage, were “debt collectors” under FDCPA.
Wilson, supra, was an action against a Maryland lawyer who sent a dunning letter to the borrower threatening foreclosure. The letter included the FDCPA “Miranda” notice that the lawyer was a debt collector. The borrower promptly sent a verification request to the lawyer which (assuming the lawyer to be a “debt collector”) triggered the requirement under FDCPA to cease collection activities until verification was provided.[4] The lawyer did not provide verification and instead commenced a judicial foreclosure.
Glazer, supra., was an action against a lawyer who commenced a judicial foreclosure action in Ohio. Ohio law permits a foreclosure to be completed by either non-judicial sale or in a judicial foreclosure action. In an Ohio judicial foreclosure, a deficiency judgment is available. The plaintiff in Glazer alleged that the judicial foreclosure plaintiff, Chase, did not actually own the loan. The Glazer opinion noted that “[a]s one commentator has observed, the existence of redemption rights and the potential for deficiency judgments demonstrate that the purpose of foreclosure is to obtain payment on the underlying home loan. Such remedies would not exist if foreclosure were not undertaken for the purpose of obtaining payment. … Accordingly, mortgage foreclosure is debt collection under the FDCPA.”[5]
The U.S. District Court dismissed the claim for relief under the FDCPA. In so doing it followed the majority of lower court decisions, including the leading case of Hulse v. Ocwen Federal Bank, 195 F. Supp. 2d 1188, 1204 (D. Or. 2002), which held that “foreclosing on a trust deed is an entirely different path” than “collecting funds from a debtor.” The Ninth Circuit upheld the dismissal, and in the process expressly disapproved the holdings of the Fourth Circuit in Wilson, supra., and the Sixth Circuit in Glazer, supra.
The Ninth Circuit acknowledged that the FDCPA specifically defines “debt collector” to include “any business the principal purpose of which is to enforce security interests.” However, this expanded definition is applicable only to more limited prohibitions against threatening repossession or eviction where no immediate right of possession exists.[6] A trustee which threatened a borrower with eviction, would become a “debt collector” and subject to the FDCPA for purposes of that specific prohibition. But such a threat goes beyond enforcing a security interest. The Ho opinion makes clear that [a]n entity does not become a general “debt collector” if its “only role in the debt collection process is the enforcement of a security interest.”[7]
The Ho opinion emphasizes that a trustee “might become a ‘debt collector’ under the general definition if he did something in addition to the actions required to enforce a security interest.”[8] This is Ho’s most important lesson. The statutory foreclosure notices refer borrowers to the beneficiary or servicer to communicate about the secured debt, including the amounts necessary to reinstate or pay in full. Trustees who communicate with the borrower on these, or any other subjects beyond foreclosure dates and deadlines, do so at their peril. Only one of the risks incurred in doing so is liability under the FDCPA.
The United Trustee’s Association, together with other organizations,[9] filed an amicus brief opposing the appeal and arguing that trustees are not “debt collectors” under the FDCPA. In its opinion, the Ninth Circuit cited and quoted the UTA amicus brief, in stating that holding trustees liable as debt collectors would “‘literally prevent [California’s foreclosure] system from functioning.’” As only one example, while the FDCPA generally prohibits a debt collector from communicating with third parties about the debt, the California trustee is required to record the NOD and mail it to junior lienholders, and to record, mail, post and publish the NOTS.
Prior to hearing argument the Ninth Circuit panel invited the Consumer Financial Protection Bureau to also file an amicus brief, and it did so.[10] On request, the Ninth Circuit granted Ms. Ho an extension of time, until December 19, 2016, to file an application for a re-hearing en banc. The CFPB can be expected to file papers in support of the petition. The chances for a re-hearing en banc, and potentially for a review by the United States Supreme Court if the ruling stands, are increased due to the fact that the Ninth Circuit in deciding Ho in a split decision has brought itself into conflict with two sister circuits. Stay tuned.
Dean T. Kirby, Jr. is a member of the firm of Kirby & McGuinn, A P.C. Dean is a certified specialist in Creditors Rights and in Bankruptcy, with over 30 years’ experience in those fields. His practice is confined to the representation of lenders, creditors and fiduciaries in foreclosure, bankruptcy commercial collection and receiverships.
[1] The opinion notes that the servicer approved a loan modification a few days before the foreclosure sale, and that it was “not clear from the record that a trustee’s sale ever occurred.” Ho, supra., 840 F.3d at 620 fn. 1. A public records search indicates that Ms. Ho is still the owner of the home.
[2] The servicer entity was BAC Home Loans Servicing, L.P., and was not correctly named in the Complaint. The District Court also dismissed claims for relief against the lender and servicer under the RICO, TILA and RESPA, as well as the FDCPA. The Ninth Circuit upheld the dismissal of the alphabet soup claims in a separate, unpublished memorandum decision. Ho v. ReconTrust Company, NA, 2106 WL 6093200 (9th Cir. Oct. 19, 2016.
[3] Ho, supra., 840 F.3d at 620.
[4] 15 U.S.C. §1692g(a)(4) & (b).
[5] Glazer, supra., 704 F.3d at 461
[6] 15 U.S.C. §1692f(6).
[7] Ho, supra., at 622, quoting Wilson, supra, 443 F.3d at 378; and citing Glazer, 704 F.3d at 464. The opinion states that this was the “central premise” of Wilson and Glazer, but that beyond this point, “our paths diverge. We view all of ReconTrust’s activities as falling under the umbrella of ‘enforcement of a security interest.’” Ho, Id.
[8] Ho, supra., at 625.
[9] The others included the California Bankers Association, American Legal and Financial Network and Arizona Trustee Association, who all contributed to the cost of submitting the amicus brief. The Ho opinion mentions, and quotes, the UTA amicus brief.
[10] The Ho opinion noted that the CFPB “has not exercised its authority to promulgate a rule interpreting the term ‘debt collector.’ Thus, we accord deference to the agency’s interpretation of that phrase only to the extent that we find that interpretation persuasive. . . . We are unpersuaded by the agency’s reading of the statute and do not defer to it.” Ho, supra, at 624 fn. 9.
