January 2017


                                                                                  Foreclosure Trustees as Non Debt Collectors

                                                                                  Roger Bernhardt and Christopher K. Odinet         


Now that our federal Ninth Circuit has agreed with our intermediate state courts that trustee activities in sending out notices of default and of sale, and conducting trustee sales under defaulted deeds of trust, do not constitute debt collection activities under fair debt collection acts (although other states and federal courts may disagree), I thought it was time to sit back and wonder what it all means. So I turned to Christopher K. Odinet, who is the Horatio C. Thompson Endowed Assistant Professor of Law at the Southern University Law Center in Baton Rouge, LA, who writes and speaks on issues related to mortgage finance and real estate and who was recently appointed as an inaugural real property scholar with the American College of Real Estate Lawyers and the American Bar Association’s Section on Real Property, Trust & Estate Law. His recent article dealing with the Consumer Financial Protection Bureau’s proposal to regulate debt collectors (forthcoming in Review of Banking and Financial Law) made me think he was the right person to ask on this. Our conversation follows.—RB

                                                                                                        Ho v Recontrust Co.

RB: What difference does it make that trustees under deeds of trust are not debt collectors?

CO: Generally, because trustees are acting only with respect to the collateral, they are not themselves trying to collect a debt. Under the Fair Debt Collection Practices Act (FDCPA) (15 USC §§1692–1692p), a “debt collector” is defined as any individual who, through any form of interstate commerce, is in the principal business of collecting debts or is one who regularly collects or attempts to collect (whether directly or indirectly) debts owed. The term does not include (among other things) the creditor who originated the debt or the purchaser of such debt if, at the time of the purchase, there was no default.

There has been a good bit of debate in the federal courts over whether a trustee of a security agreement is a debt collector under the FDCPA. Some courts have held that they are debt collectors in cases when the notice sent to the debtor by the trustee is not merely related to the nonjudicial sale of the property, but is also in furtherance of collecting a debt. Others say that when the notice refers only to the debt, but is more zeroed in on the disposition of the collateral, then the trustee is not a debt collector. However, when the United States Court of Appeals for the Ninth Circuit (which has jurisdiction over California) decided the case of Ho v Recontrust Co. (9th Cir 2016) 840 F3d 618 in October 2016 (reported at p 17), it definitively held that trustees are not typically debt collectors for FDCPA purposes. The rationale is that the purpose of trustees is not to collect the debt, but rather to effectuate the nonjudicial sale of the property. Moreover, the trustee does not attempt to collect any money from the consumer debtor himself, but rather will collect money from the purchaser at the trustee’s sale, to then be remitted to the creditor.

The fact that trustees are not debt collectors means that they are not subject to the many obligations (and potential liabilities) that the FDCPA imposes on such parties. This includes limitations on the times of the day when the collector can contact the debtor, limitations on contacting the debtor at work, and the ability of the debtor to demand that the creditor cease communications. A violation of the FDCPA can bring about monetary damages, attorney fees, and more.

RB: What advice would you give to trustees as to how to retain that label?

CO: Under the case law in many other circuits, I would say the answer is to avoid discussing topics that relate to the collection of a debt (assuming this is consumer debt—the FDCPA does not apply to commercial debt collection practices).

However, since the Ho case, it’s not clear that discussing the specifics of the loan poses a problem. For instance, in Ho, the trustee mailed a notice advising the debtor that she owed more than $20,000 on her loan and that she could bring her account current by paying all of her past due payments to Countrywide (the lender). This certainly has everything to do with the debt that is owed. The notice also stated that the debtor’s home could be sold without any court action—thereby shifting the discussion to the disposition of the collateral. However, on appeal, the Ninth Circuit said that this notice, taken as a whole, was not in furtherance of the collection of money. This is so, in the court’s view, because the object of a nonjudicial foreclosure is to retake and resell the security, not to collect money from the borrower, and the nonjudicial sale is at the heart of the trustee’s function. The court also took note of the fact that under California law, a creditor who uses a nonjudicial foreclosure action cannot obtain a deficiency judgment against the debtor, thereby giving further evidence of how the trustee’s function is separate and apart from the collection of the debt itself.

So, on the one hand, you might want to say, “OK, that’s it, trustees are not debt collectors.” But the court in Ho did leave an opening. It said: “If entities that enforce security interests engage in activities that constitute debt collection, they are debt collectors. We hold only that the enforcement of security interests is not always debt collection.” 840 F3d at 622 (emphasis added). Because of this, the question then becomes under what circumstances a trustee might also be viewed as collecting a debt. In Ho, the trustee certainly apprised the consumer of the amount owed, told her to pay the amount in order to put her back in good standing with her lender, and told her what would happen (the loss of her home) if she did not. Nevertheless, the court in Ho said these acts did not constitute “debt collection,” but were merely acts in furtherance of executing on the security. The fact that the notice was sent with the attendant loan information was only so that the trustee would comply with California’s process for nonjudicial foreclosure. This leads one to believe that there is a lot of leeway there for trustees to make statements in the notice about the debt itself and the obligation to pay without bringing the trustee’s activities into the ambit of the FDCPA.

RB: Do you have advice for attorneys of the beneficiary who write the first letter to the borrower?

CO: I think it might be useful for the beneficiary to make clear in its first letter to the debtor that the debtor will be receiving a communication from the trustee regarding the disposition of the collateral in the event the debtor does not pay, but that the beneficiary’s letter is sent in connection with making a demand on the debt. In this way, the beneficiary may try to establish a clear line between collection activity (carried out by the beneficiary—who would not be considered a debt collector under the FDCPA) and security enforcement activities (carried out by the trustee). This would at least help for evidence purposes.

RB: What significance does this decision have for debtors?

CO: For debtors, this means that many of the protections available under the FDCPA are not available against the trustee. In a time when robo-signing and shoddy foreclosure processes were the norm, this removes another arrow from the debtor’s quiver that could be used to arrest or delay foreclosure proceedings.

RB: If a borrower disputes anything in the notice of default or notice of sale sent by the trustee, what should each do? Can the trustee just ask the borrower to verify and then go ahead with the sale? Should the trustee refuse to talk to the borrower?

CO: Although the Ho decision seems pretty far-reaching, I would advise a trustee to not have too much back-and-forth with the borrower about the terms of the loan, what is owed, and how to pay to get current. Let the beneficiary’s attorney deal with those issues. The more back-and-forth over the terms of the loan, the more it may put the trustee in the business of collecting a debt. As Ho said, “If entities that enforce security interests engage in activities that constitute debt collection, they are debt collectors.” 840 F3d at 622. The key is to stay away from “activities that constitute debt collection.” Ho held that, because California law requires a notice with certain information to come from the trustee in the first instance in order to commence the foreclosure process, this action was not “debt collection.” But going over and above the legal requirements might put the trustee in dangerous territory.

RB: Do the Dodd-Frank revisions have any impact here? What about CFPB’s new rules that you wrote about?

CO: The proposal for new rules for the FDCPA that were released in July 2016 by the Consumer Financial Protection Bureau (CFPB) add greater color to the FDCPA’s statutory framework. Currently, there are no rules or regulations for the FDCPA. Congress had never authorized an agency to engage in rulemaking for this federal statute in the past. However, the passage of Dodd-Frank in 2010 changed that by giving the CFPB rulemaking authority. The agency has been working on rules and released a proposal (not a preliminary rule, but certainly a good indication of what is to come in a rule) this past July. In some ways, the rules are good for debt collectors because they clarify certain open questions—splits in circuits and in interpretations by the industry. The proposal does not, however, seek to offer any more clarification on whether trustees are debt collectors. In other words, there are no definitional changes or clarifications, but rather only clarifications on issues like time, place, and manner of communications with the debtor. The Act also imposes a host of new obligations (mostly involving due diligence before collection and disclosure of the consumer’s rights).

RB: Do you read this holding to protect all acts that trustees do?

CO: I think this holding certainly gives trustees some cover when it comes to the execution of their regular and ordinary processes involved in nonjudicial foreclosures. In other words, if you are a trustee, and your job is to handle the nonjudicial foreclosure of collateral, then anything you put in a notice/communication with the debtor is likely going to be safe from FDCPA coverage as long as it is always ancillary to the enforcement of the security. This includes instances when the notice actually contains loan information and language relative to payment, because such information and notice is part and parcel of complying with state nonjudicial foreclosure law. How broadly the Ho decision should be read is up for debate. It would certainly be advisable for trustees to be cautious about what they say to their consumer debtors, but I do think trustees should take some comfort in knowing that their industry practices are likely insulated from the FDCPA—just do not go outside them.

RB: Do you have any prediction if an en banc hearing is granted or if the U.S. Supreme Court grants certiorari?

CO: Based on the fact that the Ninth Circuit in 2012 reined in the ability of federal courts to certify consumer product class actions under certain state consumer protection statutes, I would not be surprised if an en banc Ninth Circuit upheld the panel’s decision in Ho. It’s hard to say without having a better sense of the judges on the court. As for the Supreme Court, they have not been overly eager to resolve FDCPA circuit splits in the past, so I am not certain that this will be too different. The Roberts Court has been a pretty business-friendly Supreme Court, so I would not be surprised if the justices adopted the view of the Ninth Circuit—although I think it would similarly leave open the possibility of a trustee, who engages in more than just security enforcement activities/communications, being nevertheless a debt collector. I foresee a standard rather than a rule.

RB: Does it matter if the Ninth Circuit goes one way and other circuits go another way? Will there be forum-shopping?

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CO: This is already the case. Other circuits (like the Fourth and the Sixth) have adopted a more expansive view of what constitutes “debt collection.” I think trustees (and the beneficiary lenders) would very much prefer to be in the Ninth Circuit, where it is less likely that they will have to abide by FDCPA regulations. However, the ability to engage in any sort of forum-shopping will, of course, be dictated by where loans are to be made and credit is flowing. I’m not sure that forum-shopping would be a very effective strategy in practice.



40 Real Property Law Reporter 10 (Cal CEB Jan. 2017), © The Regents of the University of California, reprinted with permission of CEB.