A recent appeals court ruling is threatening to wreak havoc on the debt collection industry while raising questions about the viability of the Consumer Financial Protection Bureau’s debt collection rule set to take effect within months.

In a surprise ruling in April, a three-judge panel of the 11th U.S. Circuit Court of Appeals said a debt collector violated the Fair Debt Collection Practices Act when it used a third-party vendor to issue an official notice to a consumer about an outstanding debt.

The decision reversed a lower court’s ruling to dismiss the lawsuit, meaning the case could be sent back to reach an eventual outcome. Still, the appeals court said the collector ran afoul of the prohibition on disclosing a debtor’s information to a third party.

Companies that routinely use third-party letter vendors, particularly mortgage servicers, say the decision has far-reaching consequences. For now, the ruling only applies to debt collectors in Florida, Georgia and Alabama, but some have raised the possibility that it could be applied more broadly.

“It was a very surprising and tremendously disruptive decision,” said Justin Wiseman, associate vice president and managing regulatory council at the Mortgage Bankers Association. “It throws a cloud of uncertainty over [the MBA’s] members in these states. Mortgage servicers are looking at their vendor relationships in light of this decision.”

The case involves the plaintiff Richard Hunstein who sued Johns Hopkins All Children’s Hospital over a debt for his son’s medical treatment. The three-judge panel ruled that his case against a Tampa, Fla., debt collector, Preferred Collection and Management Services Inc., can continue. The judges said Preferred violated the FDCPA by sending information about the debt electronically to CompuMail Inc., a Concord, Calif., collection letter vendor. The FDCPA bars any communication about a debt to a third party.

But for decades, financial services companies have routinely outsourced to vendors back-office functions such as sending debt collection letters and other notices to consumers.

Experts say the court’s decision upended long-established, standard industry practices.

“Everybody has been doing this for years,” said Aaron Weiss, an attorney and shareholder at Carlton Field. “The information is electronically transmitted to the letter vendor, that’s what they do, that’s their stock-in-trade. And it was taken for granted that this isn’t an issue. Now this decision is going to change how things are done.”

Last year, the CFPB issued a sweeping rule that clarifies how often a debt collector can conduct electronic communication with a consumer, as well as what types of disclosures debt collectors must provide to consumers at the beginning of a collection.

When it released the rule in December, the bureau said 85% of debt collectors use third-party letter vendors to send notices to consumers to validate a debt. The CFPB has not commented on the court’s decision and what effect it might have on model validation notices, a key part of the rule.

“The whole financial services industry is based on vendor management so this is not just about letter vendors, but every service provider that provides information to third parties, especially in the debt collection space,” said Joann Needleman, leader of the consumer regulatory compliance group at the law firm Clark Hill in Philadelphia.

The decision came as debt collectors already face a continual barrage of lawsuits and other pushback from consumers. Last year, debt collection was the focus of 15% of all complaints to the CFPB, the second-highest percentage.

The CFPB said nearly half of complaints regarding debt collection were about attempts to collect a debt that the consumer claimed was not owed. But consumers also aired complaints about collectors’ communications tactics, threats of legal actions, and threats of contacting someone improperly about an outstanding debt.

It is unclear what impact the court ruling will have on the CFPB’s debt collection rule but many in the industry say legal restrictions on the use of third-party communication vendors would complicate the compliance process. Before the court’s decision, acting CFPB Director Dave Uejio proposed that the compliance deadline be delayed by two months to January 2022.

“The CFPB’s debt collection rule, and many other rules impacting the financial services marketplace, very clearly rely on the industry’s ability to use letter vendors and other types of vendors,” said Mark Neeb, CEO of ACA International, the trade group for debt collectors. “We believe the opinion conflicts with the letter and spirit of Regulation F, and with the spirit of similar consumer privacy rules.”

Some suggested the CFPB doesn’t need to make any changes to the rule. They point out that the lower court could still decide in favor of the defendant.

“There’s nothing that should impact the CFPB’s adopted debt collection rule from being implemented on schedule,” said Richard Perr, co-managing partner at Kaufman Dolowich & Voluck, who represents the debt collector in the case, Preferred Collection. “There’s no question that the opinion upsets the apple cart and gives plaintiffs license to go to other circuits and see how far they can push it. But this decision only says that the case can continue and if it were to be litigated it would become a disputed factual record.”

Preferred is appealing the decision to throw out the lower court’s dismissal to the full panel of judges on the 11th Circuit, which has yet to agree to hear the case.

Since the court’s decision was filed April 21, Neeb said there have been 66 lawsuits filed, including 43 seeking class-action status, alleging that the use of letter vendors violates Regulation F.

Judge Kevin C. Newsom, a Trump appointee, acknowledged that the ruling would change how the debt collection industry operates.

“It’s not lost on us that our interpretation of [the FDCPA] runs the risk of upsetting the status quo in the debt-collection industry,” Newsom wrote in the 23-page decision released April 21. “We presume that, in the ordinary course of business, debt collectors share information about consumers not only with dunning vendors like Compumail, but also with other third-party entities. Our reading …may well require debt collectors (at least in the short term) to in-source many of the services that they had previously outsourced, potentially at great cost. Our obligation is to interpret the law as written, whether or not we think the resulting consequences are particularly sensible or desirable.”

Some experts are already questioning whether an en banc review by the full 11th Circuit would be granted given the three-judge panel’s unanimous decision.

Meanwhile, the Hunstein decision could be expanded to apply to banks and other creditors’ use of vendors in certain states, some observers suggest. Debt collectors are evaluting and implementing new printing and mailing practices. Potential shut-downs of early-stage collections could result in fewer opportunities for collectors to work with consumers to resolve debts before litigating, Neeb said.

Many financial services firms are mulling their options. Companies are figuring out how to deal with increased litigation and letter-vendor outsourcing.

“A lot of industry players are saying if we need to comply with this strictly, we need to bring this in-house so any communications now better be your back-office and not a third-party vendor,” Weiss said.

The CFPB’s rule was meant to modernize the FDCPA, which Congress passed in 1977, when companies still used telegrams to provide notices to consumers.

Some have raised the possibility that the appeals panel’s decision could be overturned because the process today by which a vendor relays communications to a consumer has been digitized, involving the high-speed printing of letters. The FDCPA never intended to prohibit that type of activity, they argue.

Perr said modern communications typically do not involve the public disclosure of consumer information because no live person actually looks at the data sent electronically by debt collectors to third-party vendors.

“The data is transmitted in an imperceptible, ministerial fashion that doesn’t involve the disclosure to human eyes,” said Perr. “Clearly there is no harm to the plaintiff in this case or in any case involving a letter vendor.”

Since the CFPB has acknowledged the widespread industry use of letter vendors, many have been left guessing about the impact of the ruling.

“The CFPB recognized the use of letter vendors and part of the rule was to provide better guidance for acceptable methods of communications,” said Cheryl Kananowicz, a division president at Rev Spring Inc., a Nashville, Tenn., letter vendor.

Meanwhile, a group of letter vendors has formed a coalition to “analyze the case, digest its potential impact, and determine effective strategies to help all clients adapt their business practices, as needed,” CompuMail said in a press release.

“We’re going to have to live in this new structure for a period of time,” Kananowicz said. “Is this six months or two years? I don’t think anyone knows.”