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The Supreme Court placed new limits Wednesday on the potential legal exposure faced by law firms that handle foreclosures on behalf of banks.
The 9-0 ruling is likely to reduce the costs that mortgage servicers incur when foreclosing on borrowers who live in states that do not require judicial proceedings to take possession of a home. It also figures to make it somewhat harder for distressed homeowners in those same states to stave off foreclosure.
Still, the mortgage industry’s win was not as sweeping as it might have been, since the justices made clear that they are not giving blanket immunity from federal debt-collection rules to law firms that represent banks in foreclosures.
The case was brought by Dennis Obduskey, a Colorado man who defaulted on a $330,000 mortgage around 2009. Wells Fargo, which was the creditor, hired McCarthy & Holthus LLP in 2014 to act as its agent in carrying out a nonjudicial foreclosure. (In more than half of all states, including Colorado, foreclosures can be handled outside of court.)
After being contacted by the law firm, Obduskey responded with a letter invoking the Fair Debt Collection Practices Act, which states that if a consumer disputes the amount of money owed, a debt collector must stop collection until it has sent verification of the debt to the borrower. The law firm allegedly moved ahead with the foreclosure without taking
The case hinged on whether McCarthy & Holthus fits the law’s definition of a debt collector. The Supreme Court concluded that it does not, as long as the law firm is taking steps required by state law to carry out a nonjudicial foreclosure.
But the court’s opinion, written by Justice Stephen Breyer, also suggested that law firms could still be sued if they try to collect money that the borrower owes, as opposed to merely taking steps that are mandatory prior to foreclosure.
Under the Fair Debt Collection Practices Act, debt collectors can be sued if they fail to follow rules that are meant to protect consumers from harassment. For example, the law prohibits phone calls at night or at work, unless the borrower agrees to accept them.
Breyer noted that states that allow nonjudicial foreclosures can and do provide additional borrower protections. More than half of all states allow banks to foreclose on delinquent homeowners without going to court.
Justice Sonia Sotomayor wrote a concurring opinion in which she noted that Congress can clarify the law if the court is interpreting it incorrectly.
The court’s unanimous opinion drew praise Wednesday from the Mortgage Bankers Association, which had filed a brief in support of the law firm’s position. The brief was also signed by the American Bankers Association, the Bank Policy Institute and the Western Bankers Association.
The ruling will result in smaller legal bills for the mortgage industry, said Matt Podmenik, general counsel at McCarthy & Holthus. His law firm has roughly 70 attorneys and operates in nine Western states.
“Had the Supreme Court ruled the other way,” he said, “you’d have to litigate these cases further and longer.”
Christopher Willis, a partner at Ballard Spahr who frequently represents financial institutions, said that banks face a trade-off in the wake of the court’s decision.
If they assign more responsibilities to the law firms they hire, they may be able to recover more money from delinquent homeowners, but they also face the prospect of higher legal costs, Willis said. If the limit the duties they give to law firms to steps that are required by the states as part of the foreclosure process, the reverse figures to be true.
Geoff Walsh, a staff attorney at the National Consumer Law Center, predicted that the court’s ruling won’t have much impact on homeowners’ ability to file lawsuits. His group had filed a legal brief in support of the Colorado borrower.
“I think that to the extent that consumers are careful about framing their legal claims, there will still be many legal claims brought,” he said.