The Sixth Circuit recently confirmed student loan servicers, who begin servicing debts after default and resale, are not liable to borrowers under the Fair Debt Collection Practices Act (FDCPA) because the servicers are not acting as “debt collectors.”

On March 25, in Willison v. Nelnet, Inc., the Sixth Circuit affirmed summary judgment for student loan servicer Nelnet, Inc. on two claims of violating the FDCPA. The panel held Nelnet could not have violated the FDCPA in its communications with the plaintiff-borrower because Nelnet was not a “debt collector” when it sent the communications.

The FDCPA protects consumers from “abusive, deceptive, and unfair debt collection practices.” 15 U.S.C. § 1692(a), (b), (e). Critically, only “debt collectors” can be liable under the FDCPA. 15 U.S.C. § 1692. A “debt collector” is “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” 15 U.S.C. § 1692a(6).

Relying on Sixth Circuit precedent, the Willison panel reiterated that loan servicers can qualify as “debt collectors,” depending on the circumstances. But in this case, a “debt collector exception” in the FDCPA exempted Nelnet from liability under the statute. The FDCPA provides that a person is not a “debt collector” when it receives a loan which “was not in default at the time it was obtained.” 15 U.S.C. § 1692a(6)(F)(iii). The Sixth Circuit concluded Nelnet fit neatly into this exception.

The plaintiff-borrower had participated in a “loan rehabilitation program” with the prior owner of her student loans. Then the loans were purchased by another owner and transferred to Nelnet for servicing. The loan purchase changed the status of the loans from “default” to “repayment” status. When Nelnet became the servicer of the loans, the loans were in repayment, not default. Nelnet also presented evidence that its business model does not include servicing loans in default, but only “current loans.”

The plaintiff called this chronology a “default washing operation” and argued it creates an FDCPA loophole for loan servicers. The panel rejected her characterization and explained that the Department of Education in fact requires lenders of loans held under the Federal Family Education Loan Program (FFELP) to provide rehabilitation programs like the one the plaintiff entered. The programs allow new lenders to purchase loans and “remove [them] from default status,” thus helping the borrowers’ financial situation. 34 C.F.R. § 682.405(a)(1). Because the plaintiff’s loans here were consolidated under FFELP and she participated in a rehabilitation program, when her loans were purchased and transferred to Nelnet for servicing, they were in repayment and not default.

For that reason, Nelnet entered the servicing picture in this case at just the right time, causing the panel to remark, “timing is everything.” Student loan servicers should take careful note of how their FDCPA obligations change before and after loans have been in default.