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The Fair Debt Collection Practices Act offers certain protections from predatory lending tactics, including collection actions on student loans. However, it only offers protection from predatory lending by “debt collectors" as defined by the Act. The Eleventh Circuit recently determined that a Pennsylvania-run guaranty agency's mistaken garnishment of a student's wages could not give rise to a claim under the FDCPA, since it is not a debt collector.
A guaranty agency acts as an intermediary between private student loan providers and the federal government. Under federal law, student loans provided by private lenders on favorable terms are guaranteed by the federal government.
Guarantors of federal student loans are run by states or nonprofit organizations. In the event of a default, the guarantor pays the student lender the defaulted amount and is subsequently reimbursed by the Secretary of Education. The guarantor, such as the PHEAA, will then try to collect on the debt using its considerable resources to repay the federal government. It gets to keep a percentage of what it collects.
A student who took out a loan from Nelnet, the student loan servicer, deferred on her existing loans because she was enrolled more than half-time as a student. This loan was guaranteed by the Pennsylvania Higher Education Assistance Agency. Nelnet and the PHEAA failed to communicate the status of the student's deferment. As such, the PHEAA began trying to collect on the deferred loans, which it mistakenly viewed as in default.
Eventually, the PHEAA began garnishing the student's wages, despite the student having called the PHEAA and them having no record of her loan being in default. The student sued the PHEAA for violation of the FDCPA.
The FDCPA excludes certain persons and entities from its definition of "debt collector." One exclusion is a person who is collecting “incidental to a bona fide fiduciary obligation." The PHEAA argued that it is not a debtor under the FDCPA under this exclusion, since it has a fiduciary obligation to the Secretary of Education to collect on defaulted debt.
The Eleventh Circuit panel agreed in a split decision. The student argued that since she never incurred the debts the PHEAA tried to collect, the PHEAA never had a fiduciary obligation to the Secretary and the exclusion does not apply.
Judges William Pryor and Gregory Katsas were unconvinced, however, finding that the text of the statute covered instances in which the guarantor merely believed there was a debt. Judge Katsas, who sits on the D.C. Circuit Court of Appeals, was on the panel by designation. In order to not be a “bona fide fiduciary," the majority reasoned, the PHEAA would have to have acted in bad faith.
In a dissenting opinion, Judge Beverly B. Martin noted that the pro se litigant would have had to “predict the future" in order to anticipate the majority's interpretation of the statute and allege bad faith, since nowhere in the FDCPA do the words “bad faith" appear. Further, Judge Martin argued, the majority's interpretation would require the statute to be reworded to say “any person collecting or attempting to collect [in good faith] any debt incidental to a bona fide fiduciary obligation." Judges cannot rewrite statutes, Judge Martin noted.
Under the FDCPA, guaranty agencies are largely protected from claims under the FDCPA. In the Eleventh Circuit, this includes situations in which the PHEAA is negligent in collecting debt. In order to have a valid claim under the FDCPA, the guarantor must act in bad faith when collecting on a defaulted debt.