United States: Creditors Can Be Found Liable For Violating The FDCPA When They Use Third Party Debt Collectors That Do Not Make Bona Fide Attempts To Collect Debts

Last week the Second Circuit held that: (1) a creditor can face liability under the Fair Debt Collection Practices Act (FDCPA) when a third party it hires to contact debtors does not make bona fide attempts to collect the debt but rather acts as a mere conduit between the creditor and debtor; and (2) the assignee of a debt is not a "creditor" for purposes of the Truth in Lending Act (TILA).

The plaintiffs in Vincent v. The Money Store were several homeowners who took out mortgage loans, each from a different lender. Each mortgage was assigned to The Money Store, and each plaintiff thereafter defaulted on his or her mortgage.

The Money Store had an arrangement with a law firm, Moss Codilis, pursuant to which the firm would mail breach notices to borrowers who had defaulted. The Money Store provided Moss Codilis with spreadsheets containing contact information for the borrowers in default, and Moss Codilis would send each borrower a virtually identical letter stating that The Money Store had retained Moss Codilis to collect a debt. However, after sending the letters, Moss Codilis rarely played any further role in collecting the debts, and if The Money Store brought collection actions against the borrowers, other firms would handle those actions. The Money Store initially paid Moss Codilis $50 for each letter, but later reduced the payment to $35 per letter. During a five-year period, Moss Codilis sent almost 89,000 of these letters. Testimony suggested that the The Money Store used Moss Codilis to send default letters on the theory that a letter on law firm letterhead was more likely to catch the attention of the defaulted borrowers.

After receiving letters from Moss Codilis, plaintiffs brought a putative class action against The Money Store, arguing that, by having Moss Codilis send the letters, The Money Store violated the FDCPA. Plaintiffs also argued that The Money Store violated TILA by charging them unauthorized fees, which created credit balances on their accounts, and then refusing to refund those credit balances. The district court granted summary judgment to The Money Store on both claims.

On appeal, the Second Circuit first addressed the FDCPA claim. The Court noted that the FDCPA applies only to "debt collectors," and that creditors such as The Money Store, as a general rule, do not qualify as debt collectors. However, the FDCPA includes within its definition of debt collector "any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts." The Court held that:

[W]hen determining whether a representation to a debtor indicates that a third party is collecting or attempting to collect a creditor's debts, the appropriate inquiry is whether the third party is making bona fide attempts to collect the debts of the creditor or whether it is merely operating as a "conduit" for a collection process that the creditor controls.

Because the record contained evidence from which a jury could find that Moss Codilis made no attempts to collect the debts and was merely acting as a "conduit" for The Money Store, the Court reversed the district court's grant of summary judgment in favor of The Money Store on the FDCPA count, and remanded that claim for further proceedings.

On the TILA claim, the Court acknowledged that TILA requires "creditors" to refund credit balances on their borrowers' accounts, but pointed out that an entity only qualifies as a "creditor" for purposes of TILA if the debt at issue was "initially payable" to that entity. The Money Store was not such an entity. Rather, other lenders originated the loans to the plaintiffs and The Money Store only later acquired the loans. Therefore, the Court held, The Money Store was not a "creditor" as that term is defined in TILA, and, as such, TILA did not require it to refund credit balances. In so ruling, the Court rejected the plaintiffs' argument that the entity that receives the first payment on a loan is a "creditor" for purposes of TILA, regardless of whether that entity originated the loan.

Although it affirmed the dismissal of plaintiffs' TILA claim, the Court questioned whether Congress intended the result that the statutory language mandated. The Court pointed out that TILA requires loan originators to refund credit balances on borrowers' accounts, but exempts any entity other than the originating lender from that requirement. In light of the fact that many originators assign their mortgage loans to others, the narrow definition of "creditor" exempts a significant number of loans from the protections afforded by TILA. The Court surmised that this result may have been the unintended consequence of amendments Congress made to TILA, and "note[d] th[e] discrepancy . . . for the benefit of Congress and the Federal Reserve."

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