Third Circuit Finds Pennsylvania Lending Law Does not Regulate Collection of Charged-off Debt

On February 7, the U.S. Court of Appeals for the Third Circuit affirmed a lower court’s decision to grant a debt collector’s (the defendant) motion for judgment. The defendant argued that its efforts to collect plaintiff’s charged-off debt via a proof of claim in a bankruptcy proceeding was not limited by, or in violation of, the Pennsylvania Consumer Discount Company Act (CDCA). The plaintiff, who obtained a loan from a third-party small-dollar lender licensed under the CDCA, defaulted on the loan and the licensed lender subsequently charged off and sold plaintiff’s debt to a company that was not licensed under the CDCA. 

After filing for bankruptcy, the plaintiff sued the defendant and alleged a FDCPA violation when the defendant filed a proof of claim during the bankruptcy proceeding to collect the outstanding balance on the charged-off loan. The plaintiff’s argument was premised on claims that the defendant could not lawfully collect the debt because the CDCA dictates that a licensee may not sell CDCA-authorized contracts to an unlicensed person or entity. As such, the plaintiff argued the proof of claim violated the FDCPA’s prohibition against “false, deceptive, or misleading” representations in connection with the collection of a debt. The 3rd Circuit disagreed.   

Relying in part on a letter from the Pennsylvania Department of Banking and Securities confirming that 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 appellate court held that “[t]he CDCA is a loan statute, not a debt collection statute,” and that “entities in the business of purchasing and collecting charged-off consumer debt are not subject to the CDCA’s regulatory scheme.” The 3rd Circuit held that selling charged-off obligations is not the same as selling the defaulted loan contract. Rather, it is selling unsecured debt, which falls outside of the CDCA’s scope. The court concluded that the CDCA’s prohibitions were inapplicable and could not be the basis for the FDCPA violation.