Third Circuit Rules Pennsylvania Consumer Discount Company Act Does Not Regulate Collection of Charged-Off Debts

Ballard Spahr LLP

Ballard Spahr LLP

On February 7, 2024, the U.S. Court of Appeals for the Third Circuit affirmed the district court’s Order granting a motion for judgment on the pleadings and holding that a charged-off loan made by a lender licensed under the Consumer Discount Company Act (“CDCA”) that is subsequently sold to a third-party debt collector is no longer subject to the CDCA and collecting on the debt without holding a CDCA license is not in and of itself a violation of the Fair Debt Collection Practices Act (“FDCPA”). Section 14I of the CDCA states:

“I.  A licensee may sell contracts to and buy contracts from another licensee upon giving prior written notification to the Secretary of Banking. The written notification shall state the name and address of the licensee to whom or from whom the contracts are being sold or purchased, the type of loan and number of contracts in the transaction and their aggregate principal balances. A licensee may not sell contracts to a person or corporation not holding a license under this act without the prior written approval of the Secretary of Banking.”

After the debtor defaulted on the loan, the loan was charged-off by the lender. The charged-off loan was then sold by the lender, re-sold, and finally assigned to a third entity to collect the debt. None of the sales were approved by the Pennsylvania Department of Banking and Securities (the state agency charged with enforcement of the CDCA); nor were the purchasers the types of businesses required to be licensed under the CDCA. The charged-off debt did not include additional charges, such as interest or late fees, only the original loan balance.

The debtor alleged that the filing of a proof of claim against his bankruptcy estate and attempting to collect the outstanding balance on the charged-off loan constituted a false, deceptive, or misleading representation in connection with the collection of a debt and/or the use of an unfair or unconscionable means to collect or attempt to collect a debt in violation the FDCPA because the CDCA prohibits a licensee from selling loans to an unlicensed person or entity.

Agreeing with the district court, the Third Circuit concluded that an attempt to collect charged-off debt is not an activity regulated by the CDCA because “[t]he CDCA is a loan statute, not a debt collection statute,” and “entities in the business of purchasing and collecting charged-off consumer debt are not subject to the CDCA’s regulatory scheme.” The decision is based in part on an amicus curiae letter from the Pennsylvania Department of Banking and Securities, which confirmed the CDCA does not apply to an unlicensed entity that purchases or attempts to collect on charged-off consumer loan accounts of debtors in bankruptcy.

The Third Circuit further explained that selling charged-off debt is not the same as selling the defaulted loan contract (which the borrower can cure), because the charged-off debt has been deemed uncollectable and is no longer performing as a loan. As a result, the Third Circuit concluded that the charged-off debt did not fall under the CDCA’s scheme and the district court had properly dismissed the debtor’s complaint.

This opinion is important to debt buyers who are purchasing charged-off debt. The last sentence of Section 14I of the CDCA, if read literally, seems to require the approval of the Pennsylvania Secretary of Banking and Securities before a loan originated under the CDCA may be transferred to an entity not licensed under the CDCA, however, the Third Circuit makes it clear that such approval need not be sought nor obtained if the loan is charged-off.

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