The third-party collections industry celebrated on Friday, September 8, 2022 when the Eleventh Circuit dismissed Hunstein vs. Preferred Collection & Mgmt. Servs, Inc., a controversial case which threatened to stop third-parties from using letter vendors to create and mail letters to consumers. But the celebration may have been a bit premature.
Why? For one, the dismissal doesn’t actually resolve anything. The case was dismissed because Mr. Hunstein lacked the standing to bring it, and the dismissal says nothing of the merit behind the initial complaint. It also does nothing to prevent or dissuade Plaintiff attorneys from copycat cases in state courts. In fact, the Court explained specifically that their ruling was related only to this plaintiff in this action. Mr. Hunstein could also refile or appeal the ruling, as it was dismissed without prejudice.
Hunstein doesn’t directly impact outsourcing by collections & recovery departments at lenders and originators, but it does affect your vendors and it may not be going away.
Here are some potential Hunstein-related issues to watch:
1. Hunstein may push your partners to insource, which will increase the cost to collect
If your collection strategy involves third-party agencies, the cost to collect will rise if agencies are forced to bring processes they typically outsource, like mailing or emailing, in-house. In fact, for most smaller shops, it will be impossible, meaning an acceleration of mergers and acquisitions among third-party collection agencies.
2. One bad ruling could affect lender / agency data exchange
While the case is specifically about third-party agencies sending consumer data, it’s conceivable that a bad ruling on this matter could expand to first parties sending data to their agency vendors. This would effectively shut down outsourced collections.
The crux of the issue is whether a third-party debt collection agency sending a data file to a third-party lender "relates to" the collection of a debt, or is "in connection with" the collection of a debt. (See more on this distinction here.) If delivering a data file is “in connection with” the collection of a debt, as argued by the Plaintiff in the case, this action may violate the FDCPA’s prohibition on third-party disclosure.
3. Your agency / partners will still need to watch out for copycat cases
Those agencies who elected to begin handling mail internally may not feel quite comfortable enough to revert back to their previous mail processes, though. Defending copycat cases in state courts may be more costly than developing their internal mail systems, and, as noted, there is no guarantee that the allegations brought in the complaint will be dismissed in future cases where the hypothetical Plaintiffs prove standing.
About the Hunstein Dismissal
There has been quite a bit of back and forth in the Eleventh Circuit around whether or not the case has standing. In April 2021, the Court held that “transmitting data to a mail vendor is an unauthorized third-party disclosure,” leading some agencies to immediately change their mailing practices, at least in the Eleventh Circuit.
Between the literal expense of setting up a mail program, and the time and resources required to do it, switching from a letter vendor to handling mail internally came at great cost for the agencies who elected to go that route. It is also detrimental to consumers because of delays in receiving information about their debts via mail.
And while the case deals directly with mail vendors, there were concerns in the third-party industry that the ruling could be applied elsewhere. That, plus the fact that the CFPB would not weigh in on whether the practice was in violation of the FDCPA, led to a general feeling of uncertainty for many agencies.
Following a petition for a rehearing en banc, and 17 parties filing amicus briefs, as well as the Supreme Court’s ruling in TransUnion LLC. vs. Ramirez (no concrete harm, no standing), the Eleventh Circuit Court of Appeals vacated its opinion in Hunstein, paving the way for the most recent dismissal.
Collections & recovery executives should take this opportunity to fully vet and understand how their agency partners collect on their behalf, and if those partners have a defense prepared in the event that they are involved in a copycat case. Start that dialogue with your vendor partners now, so you have a plan in place and can avoid major disruption in the event that a future ruling isn’t friendly to the third-party collections industry.
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