In the wake of bank failures, some institutions have acquired failed bank assets, including loans, from the Federal Deposit Insurance Corporation. Such institutions should exercise caution when collecting on consumer loans that were in default at the time they were acquired, because the institution may be viewed by courts as a “debt collector” for purposes of the Fair Debt Collection Practices Act (FDCPA). FDCPA violations can not only cause issues in cases against delinquent borrowers but also may result in damage awards against the acquiring institution.
The FDCPA distinguishes between “creditors” and “debt collectors,” and the terms are considered mutually exclusive. FDCPA requirements generally do not apply to creditors, but they do apply to debt collectors. Under the FDCPA, the assignee of a debt is considered a debt collector if the debt is in default when acquired and such debt was acquired for the purpose of collecting it. Many courts have interpreted this assignee exception very broadly, essentially holding that if the debt was in default at the time it was transferred, the assignee is a “debt collector” under the FDCPA.
For institutions that may face potential liability for an FDCPA violation based on a loan that was in default when it was acquired from the FDIC, there is a possible defense that is developing in case law, which focuses on the language of the creditor exception set forth in 15 U.S.C. § 1692a(4). Section 1692a(4) provides that a “creditor” is not exempted “to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another.” Some courts, interpreting this, have held that when an institution acquires all of a failed bank’s assets from the FDIC, that institution is not acquiring the debts “solely for the purpose of facilitating collection of such debt for another,” and thus still qualifies as an exempt “creditor,” even as to loans that were in default when assigned. This position is based on the argument that the transfer of a debt in default does not in and of itself make the institution a “debt collector”; rather, courts must consider the entirety of the FDCPA and its purpose.
Courts that have adopted this line of reasoning noted a distinction between those situations where a bank receives a debt to collect on another’s behalf and those situations where a bank wholly acquires a failed institution without regard to whether a particular debt was in default. Some courts considering this issue have also looked at other behavior of the institution, such as whether a modification was offered to the borrower prior to collection efforts, making the institution’s activities look more like debt servicing rather than unmistakable debt collection.
Although this argument has been accepted by a variety of courts throughout the country over the past few years, it does not guarantee success. Some courts, including Florida courts, although not explicitly rejecting this particular argument, continue to hold that if the debt was in default when acquired, the institution is a “debt collector” governed by the strictures of the FDCPA. An institution that acquires loans from the FDIC may therefore best protect its interests by complying with FDCPA requirements, even if it may be able to qualify as a “creditor” rather than a “debt collector.” Still, in the event of an alleged or inadvertent FDCPA violation, this is one argument that could be made in the acquiring institution’s defense.