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Ninth Circuit Holds that a Mortgage Servicer Violated the FDCPA for its Conduct Related to a Non-Judicial Foreclosure

On March 31, 2017, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit held that a mortgage servicer threatening to initiate a non-judicial foreclosure, when it could not lawfully do so, violated the Fair Debt Collection Practices Act (“FDCPA”).

As background, the plaintiff property owners fell behind on their mortgage payments and received a notice of default. However, during a foreclosure mediation, the lenders could not produce the original loan documents. Accordingly, the mediator could not issue a Certificate of Foreclosure, rendering the defendants incapable of foreclosing on the plaintiffs’ home.

Following the foreclosure mediation, the mortgage servicer continued to send the plaintiffs letters threatening to enforce the promissory note and related security instrument. This conduct persisted over the course of several months, even after plaintiffs retained an attorney who repeatedly asked the mortgage servicer to cease communications and confirm whether it had obtained the original loan documents. Eventually, the home owners sued the mortgage servicer and other entities for violating four different provisions of the FDCPA, intentional infliction of emotional distress, and a violation of the Nevada Deceptive Trade Practices Act.

The district court dismissed all of the FDCPA claims, reasoning that the mortgage servicer was not acting as a “debt collector.” Specifically, the court noted that a debt collector acts to collect a monetary obligation. The mortgage servicer, which was threatening to initiate a non-judicial foreclosure, was not attempting to collect money. Therefore, the court held that the mortgage servicer was not acting as a debt collector and was not subject to the FDCPA. The district court also dismissed the plaintiffs’ state law claims.

On appeal, the Ninth Circuit partially reversed the district court and reinstated one claim under the FDCPA. Specifically, the Ninth Circuit held that the plain text of 15 U.S.C. § 1692f(6) regulates non-judicial foreclosure activity and prohibits the “[t]aking or threatening to take any non-judicial action to effect dispossession or disablement of property if . . . there is no present right to possession of the property claimed as collateral through an enforceable security interest.” The Ninth Circuit found that the term “debt collector” has a broader definition under this specific provision and includes persons seeking to enforce the terms of a security instrument, who are not attempting to collect money. Accordingly, the district court erred by dismissing the plaintiffs’ claim under 15 U.S.C. § 1692f(6) on the ground that defendants’ alleged conduct constituted enforcement of a security interest.

The case is Dowers v. Nationstar Mortgage, LLC, and the opinion is available here: http://cdn.ca9.uscourts.gov/datastore/opinions/2017/03/31/15-15178.pdf.