New Federal Appellate FDCPA Decision Threatens to Upend Debt Collection and Loan Servicing

On April 21, 2021, the U.S. Court of Appeals for the Eleventh Circuit issued a decision that threatens significant consequences for a variety of loan servicing and debt collection industries. The upshot of the court’s holding is that anyone falling within the FDCPA’s broad definition of “debt collector” violates the FDCPA when it communicates with any third party – including a vendor or other party assisting with the collection or servicing of the loan – regarding the loan or debt.

In Hunstein v. Preferred Collection and Management Services, Inc. the plaintiff asserted a claim under Section 1692c of the FDCPA, claiming the defendant violated the statute by making an unauthorized “communication in connection with the collection of any debt” to a third party. The underlying facts of the claim will likely hit close to home for many debt collectors and loan servicers. Specifically, the defendant – a debt collector – provided its commercial mail vendor with certain limited information about a consumer and the consumer’s debt so that the vendor could populate a dunning letter and then send on behalf of the defendant. The district court granted the defendant’s motion to dismiss, holding that merely providing information to a vendor so it could fill out a form letter was not a communication “in connection with the collection of the debt.”

On appeal, the Eleventh Circuit reversed. The court first addressed the defendant’s argument that federal courts lacked Article III subject matter jurisdiction due to the absence of allegations that the plaintiff suffered a concrete injury in fact. The court agreed that the plaintiff had not alleged that he had suffered any sort of “tangible harm” or a “risk of real harm” from the defendant’s alleged conduct. But after close review of the statute, the court concluded that the plaintiff claimed “statutory injury” – that is, the mere fact that the FDCPA was allegedly violated sufficed. The court tied the alleged violation of Section 1692c with the long-standing principle forbidding “invasion of privacy” and found that Congress had sought to address that very sort of harm in enacting Section 1692c of the FDCPA. Thus, even though the plaintiff had not alleged that he suffered a “real injury” as most would understand the term, the court held that he had alleged enough of an injury to satisfy Article III.

Turning to the merits, the court applied a textualist approach to determine that the FDCPA’s prohibition on communications with third parties “in connection with the collection of any debt” applied to the defendant’s somewhat mundane communication with its own vendor. The court began by noting the broad literal meaning of “in connection with the collection of any debt.” The court distinguished the case law applying a narrower interpretation of the same language in Section 1692e of the FDCPA, holding that the different statutory text and context called for a broader interpretation of the phrase in Section 1692c. Applying that broad definition, the court concluded that even “communications” (the parties agreed that the information exchanges were “communications”) with the debt collector’s vendor in order to populate the contents of a dunning letter were prohibited.

The court seemed to recognize the drastic nature of its ruling. It expressly addressed the defendant’s contention that the use of mailing vendors is a widespread practice, and even acknowledged that the use of other common vendors may run into the same problems under the court’s interpretation of the statute. But according to the court, its obligation was “to interpret the law as written, whether or not we think the resulting consequences are particularly sensible or desirable.”

The ramifications of the court’s decision could be huge. While conventional independent debt collection firms are governed by the FDCPA, so, too, are loan servicers when they acquire servicing rights to debts already in default. Those debt collectors and loan servicers use a wide array of third parties to assist them with various collection and servicing activities, including mailing vendors, data-hosting services, insurance providers, and property appraisers. Communications with those third parties about anything even touching on a consumer’s debt may now be an FDCPA violation under the Eleventh Circuit’s reasoning. Please stay tuned as Bradley will be leading a cross-industry effort to address the consequences of the court’s ruling.

In the meantime, please join us on Friday, April 23 at 12:30 CT for a 30-minute webinar where we’ll discuss the case and the possible implications it may have on the financial services industry.

Aaron Chastain represents financial services institutions, healthcare companies, and other businesses in a broad range of litigation and compliance-related matters. Aaron has advised student loan and mortgage loan originators and servicers in complying with the complex universe of regulation and state lien laws, as well as in handling finance-related litigation, such as claims for violations of the Fair Debt Collection Practices Act (FDCPA), wrongful foreclosure, violations of the Truth in Lending Act (TILA), and violations of the Real Estate Settlement Procedures Act (RESPA). He has specific experience advising clients in the realms of student and mortgage lending, servicing, and operations.

Lee Gilley represents financial institutions, including banks, mortgage companies, debt collectors, small dollar lenders, and payment systems providers (credit cards, debit cards, prepaid cards, mobile payments, etc.) in litigation and regulatory matters related to compliance with the Card Act, ECOA, EFTA, FCRA, FDCPA, GLBA, HPA, RESPA, TILA, TCPA, CFPB regulations, and numerous other state laws and regulations. Lee is a member of Bradley’s Banking and Financial Services Practice Group, as well as the firm’s Payments and Small Dollar & Unsecured Lending industry teams.

Riley Key works with financial services clients across the country facing regulatory and enforcement challenges related to obligations imposed by the CFPB, as well as various other federal and state laws. Specifically, Riley helps clients navigate compliance with the Mortgage Servicing Final Rules in Regulations X and Z and the TILA-RESPA Integrated Disclosure Rule, as well as a host of federal and state regulations, including TILA, RESPA, FDCPA, FCRA, and ECOA. View articles by Riley.

Jonathan Kolodziej represents all types of consumer financial service providers in regulatory compliance, examination and enforcement matters. Through this work, he has assisted bank and non-bank mortgage servicers, mortgage originators, debt collectors, depository institutions, credit card issuers, small dollar lenders, reverse mortgage companies…