Editor's Note: This article originally was published by American Banker, a Collections & Credit Risk sister publication.
Constant, berating phone calls. Letters to employers that serve no purpose other than to shame the consumer. Making people's personal financial pain public. These are the evils that the Fair Debt Collection Practices Act was meant to curtail when Congress enacted the law in 1977.
The law was formed in response to "abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors" that had led to "personal bankruptcies, to marital instability, to the loss of jobs, and to invasions of individual privacy."
But much of today's FDCPA litigation does nothing to serve these original goals. Many cases are mired in technicalities, barely grazing the fringes of the worthy values the FDCPA was designed to serve. For example, I recently heard a story about a bank sending a pre-printed general flier to customers in the neighborhood advertising its services about a new branch it had opened. The consumer that received the flier sued the bank, claiming that this advertisement was an attempt to collect a debt.
Now there is a new brand of FDCPA lawsuit that stretches not just that statute, but the bounds of reason.
Before getting into the specifics of this kind of lawsuit, a brief discussion of the foreclosure process is necessary. After a lender forecloses on a home, the court issues a foreclosure judgment. This judgment allows the lender to force the sale of the property.
In recent years, properties almost never sold for enough money to cover the mortgage debt, leaving a "deficiency" between the amount the borrower owed and the value of the property. In most states, with California as a notable exception, a lender can seek to recover this deficiency through a separate claim. The lender can bring this claim in a foreclosure suit or in an independent suit in many states.
The FDCPA issue arises in cases that involve bringing these deficiency claims against people who bought investment properties out of state or people who moved out of state after the foreclosure. Debtors, or more appropriately, their attorneys, are using a questionable reading of the FDCPA's venue provision, which determines where you can sue to collect debts. They argue that you cannot sue a borrower for a deficiency where the collateral was located unless the debtor still lives there. Put another way, the debtors are claiming lenders can't sue them in the state where the property serving as the collateral for the mortgage is located.
This turns nearly every other legal principle regarding venue on its head. It is important to note that prosecuting deficiency claims in these locales does not frustrate any goal of the FDCPA, particularly because the original foreclosure suit must be brought in the jurisdiction where the property sits. The deficiency claim is merely the lender's attempt to collect a debt that was already validated through the original foreclosure suit, in which the borrower had every chance to contest it.
The legal minutiae of how borrowers and their counsel are making this argument is too detailed for an article as short as this. Yet the mere risk of the litigation is another factor to consider when determining if, and where to, bring a claim for a deficiency. Deficiency judgments, like all judgments, often go uncollected. It would add insult to injury to get a worthless judgment and then be sued for obtaining it.
Brandon M. Thompson is an attorney at Levine Kellogg Lehman Schneider + Grossman LLP. He focuses his practice on complex commercial litigation.