A law firm's letter, warning that a lien would be recorded against a woman's home if she failed to pay her annual homeowners association fees, is not exempt from the Fair Debt Collection Practices Act (FDCPA) as an attempt to perfect a security interest, the Ninth Circuit has held in Mashiri v. Epsten, Grinnell & Howell.

The defendant law firm sent a collection letter to the plaintiff seeking payment of her annual association fee, as well as related late fees, administrative fees, and legal fees, and informing her that failure to pay the full amount within 35 days would result in recordation of a lien against her property. The letter also provided a validation notice under §1692g of the FDCPA and a mini-Miranda warning stating that the communication was from a debt collector and that any information obtained would be used for that purpose. The plaintiff argued that the letter contained language that overshadowed the validation notice. The district court granted the law firm’s motion to dismiss for failure to state a claim, holding that the letter complied with the FDCPA as a matter of law, and the plaintiff appealed.

On appeal and for the first time, the defendant law firm argued that while its letter complied with the entirety of the FDCPA, the letter was only an attempt to perfect a security interest under §1692f(6) and, therefore, it was not a debt collector subject to the general validation requirements of §1692g.

The FDCPA generally defines a "debt collector" as a person whose "principal business" is debt collection or "who regularly collects or attempts to collect" consumer debts. Under certain conditions, §1692f(6) deems "taking or threatening to take any nonjudicial action to effect dispossession or disablement of property" an unfair practice. For purposes of this provision, the FDCPA's "debt collector" definition includes persons enforcing security interests when that is the principal purpose of their business. A circuit split of authority has developed regarding this part of the definition of a debt collector. Some courts have relied on this additional definition to hold that lawyers engaged in mortgage foreclosure are only subject to the FDCPA for purposes of the unfair practice provision in §1692f(6) and are not otherwise "debt collectors" subject to other provisions of the FDCPA.

The Ninth Circuit rejected the defendant's argument that it was enforcing a security interest and only subject to §1692f(6). Crucial to the panel's decision was the finding that there was "no existing security interest" for the defendant to enforce at the time it sent the letter because a lien had yet to be recorded against the plaintiff’s property. Accordingly, the Ninth Circuit held that the law firm was not seeking to enforce a security interest or lien, but to "collect [plaintiff's] overdue assessment fee and to make necessary disclosures that would perfect the [Homeowners Association's] security interest and permit it to record a lien at a later date."

The panel distinguished competing Ninth Circuit precedent in Ho v. ReconTrust Co., NA, where a trustee who sought to enforce a secured loan sent a notice of default that informed the debtor that the foreclosure process had begun, provided a timeline of future foreclosure activity, apprised the debtor of her foreclosure rights, and provided the lender's (not the trustee's) contact information for payment. The Ho court found that the trustee was not subject to the entirety of the FDCPA. As the Ninth Circuit summarized the Ho court’s conclusion, "where an entity is engaged solely in the enforcement of a security interest and not in debt collection . . . it is subject only to §1692(f)(6) rather than the full scope of the FDCPA." Relying upon this distinction in Ho, the Ninth Circuit remanded the case for consideration of whether the §1692g validation provisions were overshadowed by the lien recordation statements.

Ballard Spahr's Consumer Financial Services Group has created a team of lawyers who can assist foreclosure firms with their preparation for those examinations. Members of the team have already conducted similar compliance reviews and mock Consumer Financial Protection Bureau audits for numerous collection firms, debt collectors, and debt buyers. In addition, lawyers in the Group regularly consult with their clients engaged in consumer debt collection on compliance with the FDCPA and state debt collection laws.


Copyright © 2017 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.