This post was authored by Gabrielle Glemann and summer associate Deniz Irgi.
On June 12, the U.S. Supreme Court significantly restricted the universe of companies subject to the restrictions of the Fair Debt Collection Practices Act. In the first opinion authored by new Justice Neil Gorsuch the court unanimously ruled, in Henson v. Santander Consumer USA, Inc., that purchasers of debt who seek to collect on it for their own account are not “debt collectors” subject to the Fair Debt Collection Practices Act (FDCPA).
The FDCPA was enacted in 1978 to rein in abusive, deceptive, predatory and unfair debt collection practices, including ”disruptive dinnertime calls,” false reporting, and “downright deceit.” The Act establishes guidelines under which debt collectors may conduct business, prescribes penalties and remedies for violations of the act, and authorizes enforcement of the act by the Federal Trade Commission (“FTC”), the Consumer Financial Protection Bureau (“CFPB”), and through private lawsuits commenced by the targeted consumer. As a threshold matter, however, the act only governs the practices of a “debt collector,” defined in the statute as anyone who “regularly collects or attempts to collect . . . debts owed or due . . . another.” To the extent the party whose actions are at issue does not qualify as a debt collector, the statute provides no enforcement provisions or remedies either for the consumer or the federal agencies charged with enforcing the FDCPA.
In Henson, CitiFinancial Auto loaned money to certain consumers seeking to buy cars. The consumers defaulted on the loans, which CitiFinancial then sold to Santander. Santander’s attempts to collect on the defaulted loans gave rise to a class action lawsuit, in which the consumers alleged that Santander violated the FDCPA. The purchase of defaulted loans by market participants is not an uncommon practice; to the contrary many banks and other investors in the distressed market space will purchase defaulted loans at a significant discount to the face value of the debt and attempt to turn a profit either through consumer collection efforts or prosecuting foreclosures on collateral. This is particularly common where the original lender did not have an appetite to undertake the collection or foreclosure efforts, may find itself under regulatory pressure to off-load or reduce the non-performing portions of its loan portfolio, or otherwise sought to take advantage of an opportunity to turn a non-performing asset into a liquidated, albeit discounted, collection.
Notwithstanding the fact that purchasing and attempting to collect on defaulted loans was a regular part of Santander’s business, the district court in Henson dismissed the claims after concluding that Santander was not a “debt collector” under 15 U.S.C. § 1692(a)(6), and thus was not subject to liability under the FDCPA. On appeal the United States Court of Appeals for the Fourth Circuit affirmed, leaving a circuit court split, which the Supreme Court has now resolved
The Supreme Court conclusively and unanimously answered the question as to whether entities that regularly purchase debts and collect on them are within the definition of “debt collectors” and thus subject to the FDCPA in the negative. The Court focused on the fact that the statutory definition of “debt collector” applied to those attempting to collect debts “owed or due . . . another.” By restricting the definition to include only those who regularly seek to collect debts “owed . . . another,” the Court concluded Congress intended the statute to apply to third-party collection agents, but not to entities seeking to collect debts they owned for their own account even when they had not themselves originated the loans. In so holding, the Court rejected the petitioner’s argument that the term “owed” in the statute implied that the only parties Congress intended to exclude from the FDCPA were loan originators. As a result, the mere fact that a party has acquired a debt after default will not render it subject to the FDCPA.
Henson has far-reaching implications for banks and consumers alike. A consumer may not readily know whether a party seeking to collect on his or her debt is subject to the FDCPA, since a collection notice may not disclose whether the party seeking to collect owns the debt or not. To discourage the commencement of consumer lawsuits, buyers of debt may wish to expressly assert they are owners of the debt in their collection materials.
It is also worth noting that many states, including Washington, have adopted statutes that similarly define debt collectors as those who collect on debts owed another. RCW 19.16.100(4)(a). Henson’s interpretation of the FDCPA is not necessarily binding on interpretations of these state statutes, so it will be interesting to observe whether state courts follow the U.S. Supreme Court’s interpretation of these provisions when their statutory language is identical or similar. Some state legislatures may wish to amend their statutes expressly to regulate collection practices of entities that are in the business of purchasing and collecting on defaulted debt, like the broader definition of debt collector already adopted in Oregon, 2015 ORS 646.639(1)(g). Notably, the FDCPA does not preempt any state law that is more protective of the consumer than the FDCPA. 15 U.S.C. § 1692(n), (o).
Finally, recognizing that the FDCPA does not apply to most first-party collection practices, the CFPB has announced that it may rely on alternative rulemaking authority to regulate debt collection practices of entities that may fall outside the scope of the FDCPA. The CFPB has the authority under the Dodd-Frank Act to promulgate rules to regulate debt collection activities of “covered persons,” which include creditors seeking to collect on debts that relate to consumer financial product or service. See 12 U.S.C. § 5514 (Dodd-Frank Act § 1024). As recently as June 8, the CFPB announced that it is moving forward with the promulgation of rules that will apply to both first- and third-party creditors, but no such rules are yet in place.