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Financial Services Law Insights and Observations

9th Circuit: Student loan guaranty agency is not a debt collector under FDCPA

Courts Appellate Ninth Circuit Student Lending Debt Collection Department of Education FDCPA


On December 18, the U.S. Court of Appeals for the Ninth Circuit held that a nonprofit guaranty agency that collected delinquent student loans was exempt from the FDCPA because its “collection activity was incidental to its fiduciary obligation to the Department of Education.” According to the opinion, the matter dates back decades, where a judgment on the borrower’s three defaulted student loans was eventually assigned to the defendant, which began collection efforts on behalf of the Department of Education (the Department had previously repaid the guarantor of the loans). The defendant sent the borrower a notice in 2009 that it would begin collecting the Department’s claim by having the Department of Treasury “offset ‘all payment streams authorized by law,’ including his Social Security benefits,” to which the borrower did not respond. The borrower eventually disputed the debt in 2012 once the offset took effect, and filed a lawsuit in 2015 claiming FDCPA and Fifth Amendment due process violations. The district court granted summary judgment in favor of the defendant, ruling that the defendant was not a debt collector subject to the FDCPA and was not subject to due process because it was not a state actor.

On appeal, the 9th Circuit agreed with the district court, concluding that while the defendant satisfied the general criteria for debt collectors because it regularly collected debts that were owed to someone else, the defendant qualified for an exception because its debt collection activities were “incidental to a bona fide fiduciary obligation.” Specifically, the appellate court held that “incidental to” a fiduciary obligation meant that debt collection could not be the “sole or primary” reason the judgment had been assigned to the defendant. The appellate court explained that the defendant had a broader role beyond the collection of debts, because it had also accepted recordkeeping and administrative duties. Finally, concerning the borrower’s argument that the defendant had “arbitrarily and maliciously” garnished his benefits in violation of his due process rights, the 9th Circuit concluded that there was no due process violation because the defendant (i) had provided the borrower with a notice of the debt and its intention to recover the claim from his Social Security benefits; (ii) the notice was sent to the correct address; and (iii) the defendant’s misstatement that the debt arose from one loan rather than the total of three loans was not a due process violation.

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