Companies that purchase and service default accounts for their own account are not considered "debt collectors" under the Fair Debt Collection Practices Act (FDCPA) (unless their principal business purpose is debt collection), the U.S. Supreme Court ruled in Henson et al. v. Santander Consumer USA Inc., 582 U.S. ___ (2017), on June 12. This decision eliminates a significant source of consumer class litigation against many consumer financial services companies.

Overview

The FDCPA defines "debt collector" as any person (1) whose "principal" business purpose is debt collection, (2) who "regularly" collects or attempts to collect debts that are owed or due another, or (3) who collects its own debts, using a name other than its own. The statute then proceeds to exempt entities collecting debt owed or asserted to be owed another to the extent such activity concerns a debt that was not in default at the time it was obtained by such person.

In Henson, Santander—a large financial institution whose principal business is lending and banking—did not issue the plaintiff's debt, but rather purchased and collected on it after the plaintiffs had defaulted. Petitioners alleged that Santander violated the FDCPA in its communications with them by misrepresenting the amount of the debt and their entitlement to collect it. A circuit split had emerged regarding the correct characterization of parties like Santander. The Fourth Circuit, following the Ninth and Eleventh Circuits, agreed with the district court's finding that Santander was not a debt collector subject to the FDCPA, while the Third, Fifth, Sixth, Seventh, and D.C. circuits had adopted the opposite view.

Ultimately, the Supreme Court sided with the bank and the Fourth, Ninth, and Eleventh Circuits. In Justice Gorsuch's first opinion as a Supreme Court Justice, the unanimous Court held that the FDCPA does not care how a debt owner came to be a debt owner—whether it originated the debt or acquired it later through purchase. "All that matters is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for 'another.'" 582 U.S. __ (2017).

Responding to the policy arguments lodged by petitioners and amici (including a group of more than half of the nation's state attorneys general) that had Congress known the market for defaulted debt would grow so large when it drafted the FDCPA, it would have regulated debt purchasers more like third-party collection agencies rather than creditors, the Court found the arguments to be based on "quite a lot of speculation."

In the end, reasonable people can disagree with how Congress balanced the various social costs and benefits in this area. We have no difficulty imagining, for example, a statute that applies the Act's demands to anyone collecting any debts, anyone collecting debts originated by another, or to some other class of persons still. . . Constant competition between constable and quarry, regulator and regulated, can come as no surprise in our changing world. But neither should the proper role of the judiciary in that process—to apply, not amend, the work of the People's representatives.

582 U.S. __ (2017).

Regulatory Environment

While this decision minimizes a significant source of consumer class action litigation for banks and consumer financial services companies, the regulatory environment for collection activity remains complex and evolving.

Many state debt collection laws already directly apply to creditors, including debt buyers, and impose requirements similar to those of the FDCPA. In addition, several federal, state, and local laws, including the Consumer Financial Protection Act, the Federal Trade Commission Act, and comparable state statutes (mini-FTC Acts), prohibit unfair, deceptive, or, in some instances, abusive acts or practices (UDAAP), including those involved in debt collection. While the CFPA and FTC Act do not have private rights of action, many mini-FTC Acts often provide consumers with the ability to sue.

That said, as argued by the attorneys general in their amicus brief in support of petitioners, the FDCPA is a powerful law enforcement tool. Following this decision, there may be greater legislative and regulatory impetus to expand existing regulations or introduce new ones. The Consumer Financial Protection Bureau (CFPB), for example, has been considering a large rulemaking to cover first-party collections, including communications, substantiation, and data transfer. Although the CFPB recently announced it would first introduce regulations covering traditional third-party collection practices designed to modernize the FDCPA's requirements covering disclosures to and communications with debtors, the pressure to address first-party collections is likely to mount as a result of this development.