Alert May 29, 2012

Sixth Circuit Holds Loan Servicer Could be Debt Collector Under FDCPA

The United States Court of Appeals for the Sixth Circuit has held that a loan servicer could be a “debt collector” under the federal Fair Debt Collection Practices Act, depending on whether the loan was assigned for servicing before or after the default occurred.  The Sixth Circuit addressed the distinction between a “creditor” and a “debt collector” for purposes of the FDCPA, holding that an entity that did not originate the debt but later acquired it and sought to collect upon it must be either a “creditor” or a “debt collector.” This ruling potentially undermines a defense to FDCPA claims commonly raised by loan servicers – that neither definition is applicable such that they cannot be liable under the Act.  Under the Sixth Circuit’s ruling, a servicer is a “creditor” if the loan was not in default, or was not alleged to be in default, at the time the servicer assumes its servicing duties, and a loan servicer can be a “debt collector” under the FDCPA if the loan was in default, or was alleged to be in default (such as through the mailing of a dunning letter to a borrower), when the servicer takes assignment of the servicing rights.  Click here for the opinion.