High Court Takes On FDCPA ‘Debt Collector’ Definition

Last month oral arguments were heard by the U.S. Supreme Court in the matter of Henson v. Santander Consumer USA Inc. The case focuses on Santander’s activity while they were collecting defaulted auto loans and if said activity is covered under the Fair Debt Collection Practices Act. The FDCPA only applies to “debt collectors” so the question becomes who is a “debt collector” under the FDCPA. Santander is arguing that they ceased to remain a debt collector the moment they purchased the assignment of the debt they were collecting. They argue at that moment they are not collecting debt that was owed or due another, rather they were collecting debt they were owed. This case will settle a circuit split amongst the appeals courts with the Third, Fifth, Sixth and Seventh Circuits, and the District of Columbia Court of Appeals holding that collectors of purchased defaulted debt are debt collectors within the meaning of the FDCPA, while the Fourth, Ninth and Eleventh Circuits all holding that collectors of purchased defaulted debt are not debt collectors within the meaning of the FDCPA.

The FDCPA at 15 U.S. Code § 1692a(6)(f), defines the term “debt collector” as:

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 … The term does not include … (F) any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity: (i) is incidental to a bona fide fiduciary obligation or a bona fide escrow arrangement; (ii) concerns a debt which was originated by such person; (iii) concerns a debt which was not in default at the time it was obtained by such person; or (iv) concerns a debt obtained by such person as a secured party in a commercial credit transaction involving the creditor.

Santander argues that once an entity purchases debts and then attempts to collect them for its own account, it no longer qualifies as a debt collector under the FDCPA as they are attempting to collect debts owed or due itself, not owed if due another as used in the statue. It is important to note that Santander was immediately questioned by the court, if the pleadings in the underlying action had alleged that Santander’s principal business was that of debt collection if they would still argue that they are exempted from the act simply because the debt they are collecting is debt they own. Santander’s response was , “No, we would not contend that.” This is important because the court may be looking to carve out the specific actions of an entity such as Santander whose principal business is not debt collection, but may avoid regulation under the FDCPA where they own the debt attempting to be collected.

Justice Stephen Breyer raised a similar concern when questioning Henson on their definition of “owed,” asking, “what about one of these companies that goes and buys up other companies, turns them around, and sells them. When they buy a company, they buy the — the receivables. And while they own the company, they’re going to collect the receivables. On your definition, those receivables were once owed the company that they’re bought. So on your definition, that whole category of people falls within the definition of debt collector.” The court’s line of questioning appears as if they will agree with Santander’s arguments and exclude debt buyers from liability under the FDCPA.

That said, the relief by certain collections departments and lenders may not be enjoyed very long. Adding to the regulatory volatility within the debt collection industry is the fact that both first-party and third-party debt collectors are awaiting new debt collections regulation from the Consumer Financial Protection Bureau, who most recently released an outline of their debt collection rule promulgation efforts in July of last year. The released proposals applied to debt acquired in default and to collection agencies, debt buyers, collection law firms and loan servicers. If the Santander case is found to exclude debt buyers, the CFPB pending rule may bring the same debt buyers who see some relief under a pro-Santander decision right back to where they started, subject to a new set of regulations covering debt collection.

The CFPB also stated in July, when this outline was released, that it “expect[s] to convene a second proceeding in the next several months for creditors and others engaged in collection activity who are covered persons under the Dodd-Frank Act but who may not be ‘debt collectors’ under the FDCPA” and we expect these proposals to be released anytime now, possibly right after we see a decision in Henson v. Santander.

This article was originally published on Law360.

 

Craig Nazzaro

Craig Nazzaro

Of Counsel at Baker Donelson
Craig Nazzaro, Of Counsel in our Atlanta office, advises lenders and servicers on all regulatory and compliance issues that impact the consumer lending industry, and defends them against charges of liability and any regulatory violations. Contact Craig at cnazzaro@bakerdonelson.com.
Craig Nazzaro