Does a Recent FDCPA Appellate Decision Conflict with CPFB Guidance?

The United States Court of Appeals for the Ninth Circuit in early July ruled that a major bank did not qualify as a “debt collector” under the Fair Debt Collection Practices Act (FDCPA), even though the mortgage debt it sought to collect was in default at the time it was assigned to the bank.

In Schlegel v. Wells Fargo Bank, N.A., the panel sided with defendant Wells Fargo and upheld a lower court finding that the FDCPA did not apply to the bank.

After the plaintiffs’ defaulted home loan was assigned to Wells Fargo, the plaintiffs entered into a loan modification agreement with the bank and proceeded to make payments under the agreement, according to the Consumer Finance Litigation blog of law firm Burr & Forman. But Wells Fargo began mistakenly sending the plaintiffs a series of default letters which threatened acceleration and foreclosure.  The plaintiffs then sued Wells Fargo for violations of the FDCPA and the Equal Credit Opportunity Act (ECOA).

Wells Fargo moved to dismiss the FDCPA claim, claiming that it was not a “debt collector” under the FDCPA. The district court agreed, finding that Wells Fargo fell within the FDCPA’s definition of “creditor,” rather than a “debt collector,” and was not subject to the statute’s provision.

The ruling stands in stark contrast to recent statements and official guidance from the Consumer Financial Protection Bureau (CFPB) regarding their regulation of unfair, deceptive, and/or abusive debt collection practices.

The CFPB two weeks ago noted that unfair, deceptive, and/or abusive or debt collection practices apply to creditors as well as third party debt collectors. All of the practices are spelled out in the FDCPA.

The agency did, however, note in its guidance that “the obligation to avoid [unfair, deceptive, and/or abusive practices] under the Dodd-Frank Act is in addition to any obligations that may arise under the FDCPA. Original creditors and other covered persons and service providers involved in collecting debt related to any consumer financial product or service are subject to the prohibition against [unfair, deceptive, and/or abusive practices] in the Dodd-Frank Act.”

So as long as creditors aren’t engaged in practices that could be defined as “unfair, deceptive, and/or abusive,” they still may avoid liability under the FDCPA. In short: creditors still may be shielded from the technical violations of the law that are so common in suits against collectors.