Use of Third Party Vendors in the Debt Collection Services Industry
The Hunstein Decision
The debt collection sector, and the financial services industry in general, was shaken by the 11th Circuit Court of Appeals’ ruling in Hunstein v. Preferred Collection and Management Services Inc. more than a year ago on April 21, 2021. That ruling called the legality of the typical collection tactic of hiring a third-party vendor to send consumers collection letters was called into doubt. However, even the Consumer Financial Protection Bureau recognized the modus operandi as legal in the debt collection rule approved in 2021 because it was widespread and widely accepted.
Although no one at the business providing collection letters ever saw the information that had been automatedly processed, the Hunstein court held that the mere transmission of information to a letter vendor to enable the automated processing and mailing of a letter to a consumer was a “communication” with the letter vendor under the Fair Debt Collection Practices Act. In particular, the court held in the original opinion that: (1) A consumer had standing to bring a claim under the Fair Debt Collection Practices Act (FDCPA) because he alleged a violation of his privacy based on the dissemination of his debt-related information; and (2) A debt collector’s outsourcing of its letter process to a third-party mail vendor violates the FDCPA because sending the data to create and mail consumers’ letters violates the prohibition on third-party disclosure
The financial services industry paid attention when this shocking decision was made because almost all financial institutions and service providers used letter suppliers to give customers the information they needed. Numerous copycat lawsuits were brought in nationwide state and federal courts, adding to the agony.
As the courts started to reexamine the flawed ruling, various debt-collecting business organizations chimed in, including ACA International, which filed an amicus brief. The Credit Union National Association, Mortgage Bankers Association, American Bankers Association, American Financial Services Association, Consumer Bankers Association, and the Housing and Policy Council were among the other financial services trade bodies that submitted amici curiae briefs. “Appellant Richard Hunstein’s position, in this case, threatens the functioning of debt collectors, mortgage servicers, and the larger financial services industry, as well as the many other sectors of the economy that depend upon access to financial services,” they said in their amici brief.
The financial services sector suffered another setback when a panel of three judges upheld the original ruling in late October 2021. They held that:
- The alleged violation of Section 1692c(b) in the case results in a concrete injury, in fact, under Article III;
- The debt collector’s transmission of the consumer’s personal information to its dunning letter vendor constituted a communication “in connection with the collection of any debt” within the meaning of (b). After then, Preferred Collection requested an en banc review.
The 11th Circuit delivered an en banc opinion on September 8, 2022, reversing the earlier rulings after months of awaiting more information, finding no actual harm, and, hence, no Article III standing. Even though the court did not address the more essential issues about the validity of congressional intent, it did offer some valuable dicta. In that context, the court declared:
“But even assuming—which we do not—that Congress was aiming to target the commonplace vendor connections asserted here, congressional intent does not automatically translate every debatable infringement of privacy into a plausible, verifiable harm,” the author writes. Courts lack the “freewheeling power to hold defendants accountable for legal breaches,” according to TransUnion. We lack jurisdiction to evaluate Hunstein’s claim because he has merely asserted a legal infraction—a “bare procedural violation”—instead of a concrete damage.
This ruling is important for the financial services sector because it puts similar cases brought in federal courts in peril that were on hold until this decision. In addition, though many copies of Hunstein cases are still pending in state courts, it is anticipated that similar lawsuits will continue there.
What does this entail for companies that offer debt collection services and use letter vendors?
It may now be riskier to use letter vendors than before the en banc panel’s ruling in light of the original ruling. Arguments against the use of a letter vendor relating to privacy seem exaggerated given the en banc panel’s skepticism about whether this practice indeed causes harm, helpful dicta, and the CFPB’s apparent approval of using third-party vendors. Nevertheless, the use of letter vendors may become more challenging now that this can of worms has been opened. Thus financial services firms should continue to follow this case in state courts.
Since the National Consumer Law Center and other organizations filed an amicus brief outlining privacy issues, it may also be pertinent to keep an eye on any potential advocacy groups’ attempts to broaden the scope or reading of the FDCPA through state or federal legislation that mirrors Hunstein’s concerns.
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