Appellate Court Rules Using Vendors to Provide Mailing Services Violates FDCPA

Editor’s note: The following information is contributed from credit union law firm, Farleigh Wada Witt.

A recent decision from the U.S. Court of Appeals for the 11th Circuit calls into question what has likely been a regular practice for some collection agencies – the use of third party vendors to perform services such as mailings.

The Federal Fair Debt Collection Practices Act, specifically 15 U.S.C. § 1692c(b), prohibits a debt collector from communicating “in connection with” the debt with any person other than the consumer (or their attorney), a credit reporting agency, the creditor, or the attorney for the creditor or debt collector. In Hunstein v. Preferred Collection and Management Services, Inc., the collection agency created a data file that contained names and addresses of debtors, along with the amount of the debt and the nature of the debt and transmitted that file to a vendor that used the data file to create and mail demand letters to the debtors identified in the file. It probably did not help that in this case the debt in question arose from costs of medical treatment for the consumer’s son, and the information transmitted to the vendor included those facts.

The collection agency asked the trial court to dismiss the consumer’s lawsuit on the grounds that the FDCPA’s prohibition focuses on demand letters or other similar communications to outside parties, and not to sharing of information with service providers acting on behalf of the collection agency. The trial court agreed with the collection agency and dismissed the case. The Court of Appeals reversed, holding that the language of the FDCPA is not limited and applies to any communication a debt collector makes with any third party other than those enumerated in the statute. Most observers anticipate that the collection agency will ask the Court of Appeals to reconsider its decision but at this time no motion for reconsideration has been filed.

The decision does not directly impact credit unions in the Northwest, but credit unions should ensure that any collection agency they use is aware of the decision and acts accordingly. The FDCPA does not apply to creditors collecting their own debts, but only to collectors acting to collect the debts of others. Also, credit unions are subject to CFPB’s privacy rule, Regulation P, which expressly authorizes sharing of information with service providers in the collection of debts. Moreover, this type of sharing is disclosed in the privacy policy disclosure required by Regulation P. Neither Oregon, nor Washington or Idaho have a statute similar to the FDCPA’s third party communication prohibition that applies to creditors collecting their own debt. (Oregon’s Unlawful Debt Collection Practices Act applies to creditors directly, but does not include such a prohibition.)

The Eleventh Circuit Court of Appeals covers Alabama, Florida, and Georgia. Its decisions are not binding on the Ninth Circuit (which covers Idaho, Washington, Oregon, and a number of other western states). But the Ninth Circuit has a decidedly pro-consumer bent and may view this decision as persuasive. Although consumers could not initiate claims against credit unions under the FDCPA, claims against the collection agencies might result in reputation risk or might inhibit the collection of the related claims. Credit unions should ensure that their collection agencies are aware of this decision and act accordingly. This is also a good opportunity to review agreements with collection agencies to verify that they include appropriate requirements for compliance and indemnification of the credit union for violations.

For questions, please contact the legal experts at Farleigh Wada Witt.

Posted in Public Awareness.