By Henry C. Meier, Esq.

An erstwhile observer of the credit union industry recently brought a case to my attention in which a West Virginia federal court ruled that PenFed was a debt collector (JOSEPH BOCZEK, Plaintiff, v. PENTAGON FEDERAL CREDIT UNION d/b/a PENFED, Defendant., No. 1:23-CV-43, 2024 WL 1288667 (N.D.W. Va. Mar. 26, 2024).

I’m glad she did. The case dealt with a nuanced area of law and underscores how challenging it can be for federal credit unions to determine whether to comply with state laws.

First, some basics. In passing the Federal Debt Collection Practices Act, Congress clarified that only third-party debt collectors are subject to this law. It defines a debt collector as a person” 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.A. § 1692a.

This means that a credit union is not subject to the FDCPA simply because it seeks to collect on a delinquent loan that it originated. In contrast, if your credit union sells delinquent loans to third parties that specialize in debt collection, the entities to which you sell are subject to federal law.

What impact does the FDCPA have on state debt collection laws? Even as Congress provided a narrow definition of ‘debt collector,’ it stipulated that states were free to provide more expansive protection. Specifically, 15 USC Section 1692n provides that the FDCPA does not preempt state laws that provide consumers “greater protection” than the FDCPA. Not surprisingly, courts analyzing this issue have reached a similar conclusion (Pirouzian v. SLM Corp., 396 F. Supp. 2d 1124, 1131 (S.D. Cal. 2005).

Which brings us back to the case that sparked the interest of my erstwhile observer and colleague. Joseph Boczek is seeking to bring a class-action lawsuit against PenFed for violating several West Virginia consumer protection laws, which apply to debt collectors. The lawsuit was brought because PenFed charged a fee to members who made loan payments over the phone.

PenFed made two basic arguments. One was that charging a fee does not make it a debt collector as a matter of state law. The court disagreed, noting that West Virginia has an expansive definition of debt collector to maximize consumer protections. The second argument is why this opinion is worth paying attention to regardless of the state or states in which your FCU operates.

Among the most important powers given to NCUA’s Board by The FCU Act and regulations is the authority to regulate the loans and lines of credit provided to members, including the fees charged for such loans. 12 C.F.R. § 701.21

Since West Virginia sought to penalize a federal credit union for charging a fee in connection with a loan repayment, PenFed argued that it was encroaching on an area of law left to the discretion of NCUA. In fact, several legal opinion letters are posted on the NCUA’s website, using this power to preempt state laws seeking to prohibit certain fees from being charged by federally chartered credit unions. See Preemption of Georgia law regarding check-cashing fees.

But the same regulation also provides that “it is not the Board's intent to preempt state laws affecting aspects of credit transactions that are primarily regulated by Federal law other than the Federal Credit Union Act, for example, state laws concerning credit cost disclosure requirements, credit discrimination, credit reporting practices, unfair credit practices, and debt collection practices. Applicability of state law in these instances should be determined pursuant to the preemption standards of the relevant Federal law and regulations.”

Against this backdrop, the court ruled that NCUA’s preemption regulations did not preempt West Virginia’s prohibition against debt collectors charging certain fees.  Otherwise, the Court noted, consumers would not have a remedy against a federal credit union’s “improper fee collection.”  Of course, this presupposes that the fee was illegal in the first place.

Here are some takeaways. When determining whether your federal credit union is subject to state laws related to debt collection, start by analyzing the state’s legislation. Even if your credit union is not subject to the FDCPA, it may very well be subject to state law.

Secondly, preemption is often a fact-sensitive determination. Avoid making categorical assumptions about whether a law applies to your federal credit union. Instead, understand the analytical framework and obtain a lawyer’s advice if the issue is important enough. 

Finally, remember that you are ultimately making a policy decision about whether the burden of complying with a state law outweighs the risk of being sued for noncompliance with a state mandate.