Second Department Holds That Foreclosing Lender is Not a “Debt Collection Agency” and, Therefore, is Not Subject to Licensure Under New York City Administrative Code Section 20-490

• Posted on: Sep 3 2021

By Jonathan H. Freiberger

The New York City Council promulgated rules to, inter alia, protect consumers from debt collection agencies (see Title 20, Chapter 2, Subchapter 30 of the New York City Administrative Code (the “Code”). Indeed, the Code’s “legislative declaration” (§20-488) recognizes that some debt collection agencies are “unscrupulous” and employ “abusive tactics”.  

The Code, at §20-489(a), defines “debt collection agency” as:

a person engaged in business the principal purpose of which is to regularly collect or attempt to collect debts owed or due or asserted to be owed or due to another and shall also include a buyer of delinquent debt who seeks to collect such debt either directly or through the services of another by, including but not limited to, initiating or using legal processes or other means to collect or attempt to collect such debt….

Section 20-490 of the Code, which requires “debt collection agencies” to be licensed, provides:

§20-490 License required. It shall be unlawful for any person to act as a debt collection agency without first having obtained a license in accordance with the provisions of this subchapter, and without first being in compliance with all other applicable law, rules and regulations.

The issue of whether a foreclosing lender is a “debt collection agency” requiring a license under the New York City Administrative Code was decided on September 1, 2021, by the Appellate Division, Second Department, in Citibank, N.A. v. Wu.  In Citibank, defendant borrowers borrowed money from Approved Funding Corp. and executed a promissory note to evidence their repayment obligations.  To secure their repayment obligations, borrowers executed a mortgage on real property.  Borrowers defaulted under the note and mortgage (the “Default”).  Citibank (“Lender”), which acquired the note and mortgage from Approved Funding subsequent to the Default, commenced action to foreclose the mortgage in which it did not seek a deficiency judgment against borrowers.  Among other defenses in borrowers’ answer, was that Lender “failed to allege that it had obtained a license to act as a ‘debt collection agency’ pursuant to Administrative Code §20-490.”

Lender moved for summary judgment on the complaint and to strike borrowers’ answer.  Borrowers cross-moved, inter alia, “in effect pursuant to CPLR 3211(a)(7) to dismiss the complaint insofar as asserted against them for failure to allege that [Lender] had obtained the aforementioned license (see CPLR 3015[e][, which requires that a complaint alleges proper licensure under certain circumstances set forth therein]).”  (Hyperlink added.)  Supreme court granted Lender’s motion and denied borrowers’ cross-motion.  

On borrowers’ appeal, the Second Department affirmed supreme court’s order for a variety of reasons.  First, the Court determined that Lender was not required to be licensed pursuant to §20-490 of the Code and, therefore, rejected borrowers’ argument that “the foreclosing plaintiff in this case meets the … definition of ‘debt collection agency’” under the Code.  The Court noted that RPAPL Article 13 (which governs mortgage foreclosure actions) “distinguishes between an action to recover any part of the mortgage debt and an action to foreclose the mortgage (see RPAPL 1301).”  (Hyperlink added.)  [Ed. Note: this Blog has addressed issues related to RPAPL 1301 [here], [here] and [here].]  Thus, a mortgage foreclosure action “is not an action to recover the mortgage debt from the mortgagor personally, but to collect it out of the land by enforcing the lien of the mortgage.”  (Citations and internal quotation marks omitted.)  This is particularly so where the lender does not seek a deficiency judgment against the borrower.

Even if a mortgage foreclosure action constituted debt collection, the Court continued, the Lender “was not a ‘debt collection agency’ under the Code because to be characterized as such the debt collection efforts must be made on behalf of “another.”  Since the Lender held the note, it was acting on its own behalf and not on behalf of “another.”

Further, notwithstanding that a “debt collection agency” includes “a buyer of delinquent debt who seeks to collect such debt,” Lender still did not qualify as a “debt collection agency” even though it acquired the underlying note from Approved Funding.  First, the Court stated:

the language of Administrative Code § 20-489(a) is ambiguous in the sense that it is unclear whether the requirement that the “principal purpose” of the business be the collection of debt is intended to apply to the entire, expanded definition of “debt collection agency,” or only to the first part of the definition pertaining to the collection of debts owed to another. To the extent the “principal purpose” requirement also applies to the expanded definition of “a buyer of delinquent debt who seeks to collect such debt,” the [borrowers] did not show, or even attempt to argue, that it is the “principal purpose” of [Lender] to buy and collect delinquent debt. Thus, to the extent that the “principal purpose” requirement modifies the entire definition of “debt collection agency,” the plaintiff would not fit within that definition.

Second, even if the “literal language of the expanded definition of ‘debt collection agency’ covered an owner of a note acquired after default, who is pursuing judicial mortgage foreclosure,” the Court concluded that such a literal interpretation is inconsistent with the legislative intent of the Code.  The Court reasoned that the abusive tactics that the Code was designed to protect against are not present in judicial foreclosures.  Indeed, the statutory scheme for judicial foreclosures “operates to protect homeowners and ensures fairness in the process, in a far more comprehensive manner and in ways that might not be entirely consistent with the [Code].”  For example, the notice requirements of RPAPL 1303 and 1304 are designed to protect mortgagors.  [Ed. Note: this Blog has addressed issues related to RPAPL 1303 and 1304 [here], [here], [here], [here], [here] and [here].]  Similarly, CPLR 3012-b(a), requires that residential foreclosure actions involving a “home loan,” include an attorney certification that the pleading and the underlying facts alleged therein have been reviewed by an attorney and that “there is a reasonable basis for the commencement of such action and that the plaintiff is currently the creditor entitled to enforce rights” under the loan documents.  (Citations and internal quotation marks omitted.)  Further, in residential mortgage foreclosure actions involving a “home loan,” CPLR 3408(a)(1) requires that the court hold a settlement conference to address a variety of issues.

Thus, the Court stated that “[i]n light of these and other specific state statutory requirements enacted to protect homeowners in residential foreclosure, we conclude that the City Council did not intend to include a plaintiff pursuing a judicial foreclosure action such as this one within the definition of ‘debt collection agency’ set forth in the Administrative Code.”

As fully discussed in its decision, the Second Department noted that its conclusion is “supported by the interpretation of the United States Supreme Court of provisions of the Fair Debt Collection Practices Act (15 USC § 1692 et seq….), which are similar to the subject … Code provisions (see Obduskey v McCarthy & Holthus LLP, ___ US ___, 139 S Ct 1029 [(2019)]; see also Eric M. Berman, P.C. v City of New York, 25 NY3d [684] at 691 [2015] [looking to federal case law under the FDCPA for guidance in interpreting the subject provisions of the Administrative Code]).”  (Hyperlinks and some brackets added.)

Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.