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Ninth Circuit Holds That Enforcing A Security Interest Is Not Necessarily Debt Collection

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.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Mark G. Rackers, Business Trial Lawyer, Sheppard Mullin
Associate

Mr. Rackers is an associate in the Business Trial practice group in the firm's San Diego office.

Areas of Practice

Mr. Rackers practices general business and commercial litigation.  He has successfully represented clients in both state and federal court, involving claims for breach of contract, fraud, quiet title, unfair business practices and unfair competition, breach of fiduciary duty, negligence, civil harassment, unjust enrichment, Truth in Lending and Real Estate Settlement Procedures Acts...

619-338-6648
Shannon Z. Petersen, Business Trial Legal Specialist, Sheppard Mullin
Partner

Shannon Z. Petersen is a partner in the Business Trial Practice Group in the firm’s Del Mar office and is co-chair of the firm’s consumer class action defense team and the firm’s TCPA class action defense team.

Areas of Practice

Dr. Petersen has substantial trial experience as a business litigator, including consumer class action defense. He has successfully represented clients in claims involving the federal Telephone Consumer Protection Act (TCPA), the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Acting (FCRA), the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Acts (RESPA); California's Unfair Competition Law (UCL), Consumers Legal Remedies Act (CLRA), Rosenthal Act, Automobile Sales Finance Act (ASFA or Rees-Levering), Vehicle Leasing Act, Confidentiality of Medical Information Act (CMIA); breach of contract, insurance bad faith, unfair business practices, false advertising, fraud, breach of fiduciary duty, negligence, wrongful foreclosure, wrongful repossession, unfair debt collection, unfair credit reporting, unjust enrichment, misappropriation of trade secrets, trademark infringement, quiet title, emotional distress, construction defect, privacy, and receiverships, among others.

619-338-6656