Payment Law Advisor Legal Commentary and Resources for the Payment Industry

Supreme Court Narrows FDCPA’s Definition of Debt Collector

Posted in Regulatory and Compliance

final notice square grunge stampDebt buyers generally are considered “debt collectors” under the Fair Debt Collection Practices Act (“FDCPA”).  However, on June 12, 2017, the Supreme Court decided Henson v. Santander Consumer USA Inc., which resolved an existing circuit split and unanimously affirmed a Fourth Circuit holding that a company that collects debts that it had purchased for its own account does not trigger the statutory definition of “debt collector” within the Fair Debt Collection Practices Act (“FDCPA”).  Accordingly, a certain subset of diversified debt buyers – those who are not principally engaged in the business of debt collecting – who own the debts upon which they try to collect are not considered ”debt collectors” under the FDCPA.

The Court’s holding (discussed further below) is narrow – it does not directly impact debt buyers that service, rather than own, accounts; debt buyers principally engaged in debt collection; or debt buyers that collect under a third-party name other than their own.  Additionally, the Court left the door open with respect to whether an entity can be both a “creditor” and a “debt collector” under the FDCPA.  Thus, we could see increased litigation on this front, as well as with respect to the status of passive debt buyers under the FDCPA and debt buyers that rely on the affiliate exception in 15 U.S.C. 1692a(6)(B).

The holding is likely to narrow the scope of the CFPB’s upcoming FDCPA rulemaking to exclude the specific subset of debt buyers at issue in the case. The Court’s decision is also likely to deter future CFPB consent orders similar to the Bureau’s 2015 order against Discover Bank (where the Bureau held the bank liable for FDCPA violations with respect to collection activities relating to purchased student loan portfolios).  Had the Court’s decision been issued before 2015, the Bureau likely would have concluded that Discover Bank was not subject to the FDCPA.

Turning to the specifics of the case, it involved Santander Consumer USA Inc., which acquired defaulted loans from CitiFinancial Auto and then collected on those loans under Santander’s own name. The petitioners argued this activity made Santander a debt collector subject to the FDCPA.  The Fourth Circuit Court of Appeals disagreed, holding that Santander was not a “debt collector” because the debt purchaser owned the debts and was not seeking to collect a debt “owed . . . another.”

The only issue before the Court was whether a purchaser of defaulted debt constitutes a “debt collector” because it “regularly collects or attempts to collect . . . debts owed or due . . . another.”  Notably, the Court did not consider whether a purchaser of defaulted debt is engaged “in any business the principal purpose of which is the collection of any debts.”  This means that “pure play” debt buyers are likely still subject to the FDCPA.

In an opinion delivered by Justice Gorsuch (in his first opinion from the bench), the Court looked almost exclusively to the plain statutory language, specifically the phrase “owed . . . another.”  Rejecting all of the petitioners’ arguments, the Court stated that “[b]y defining debt collectors to include those who regularly seek to collect debts ‘owed . . . another,’ the statute’s plain language seems to focus on third party collection agents regularly collecting for a debt owner—not on a debt owner seeking to collect debts.”  Because Santander owned the debts when it began collection activities, the Court concluded that by the plain language of the statute, the debt was not owed “another.”

The Court stated further that “this language appears to suggest that we should care how a debt owner came to be a debt owner . . . [a]ll that matters is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for ‘another.’” Thus, the Court held that ownership of the debt is only relevant at the time of collection, not at the time of acquisition. In other words, because Santander owned the debt at the time it began collection activities, the debt was not owed to “another” and Santander was not a debt collector. It is irrelevant that the debt was owed to “another” (CitiFinancial Auto) at the time Santander purchased the debts.