Who Is An FDCPA Excluded “Creditor”?

The FTC Seeks to Overturn An 11th Circuit Ruling That A Bank Is.

Banking lawyers whose institutions acquire loans or card accounts may want to watch how this 11th Circuit putative class action case issue plays out. The FTC’s brief supports the plaintiffs’ class action bar, and the outcome of the appeal if reversed could further spur both regulatory enforcement activity and consumer class actions.

The FTC recently filed an amicus brief in a consumer’s appeal pending in the US Court of Appeals for the 11th Circuit, Davidson v. Capital One Bank, NA, Case No 14-14200. In the appeal, the 11th Circuit affirmed the Northern District of Georgia’s dismissal of Davidson’s claims (and those of a putative class) under the Fair Debt Collection Practices Act, 15 USC § 1692.   The FTC now seeks en banc review to overturn the ruling. The FTC argues that the 11th Circuit misread the statute, decided contrary to several other circuits (the 3rd, 5th, 6th and 7th Circuits), and is placing consumers at risk. The FTC contends that the defendant bank clearly was a “debt collector” as defined by the statute.

The conundrum essentially turns on two issues: (a) the FDCPA’s exclusion of the “creditors” from the coverage of the statute and (b) whether the defendant bank was principally in the business of collecting debts owed to another. In the case, the defendant bank had acquired Davidson’s credit card account from another banking institution. The credit card debt was in default at the time of the acquisition. Some, including the FTC, would argue that this falls squarely within the definition of debt collector under the statute. However, the defendant Bank argued successfully that in the Davidson matter, the institution’s collection efforts only applied to debt it owned, not to another’s.

The statute uses the key phrase “to whom the debt is owed” in the exclusionary language regarding creditors. 15 USC § 1692a(6). Arguably in this case, once the bank acquired the credit card account, the debt is/was owed to that institution. This is precisely the basis on which both the Northern District of Georgia and 11th Circuit dismissed the claims. The rulings also note that the defendant bank is not principally in the business of collecting the debts of others.

The genesis of the FDCPA was to thwart aggressive and unscrupulous tactics by third party (generally non-regulated) debt collection companies to whom the defaulted debts had been sold for the sole purpose of collection. In my view, that is not what happened in Davidson. The defendant institution owns the debt and is collecting it on its own behalf. While consumers certainly should be protected from unscrupulous practices, here the defendant is a large regulated banking entity which presumably is focused on compliance, on treating customers properly, and avoiding “UDAP” activities.

The FTC urges the court to focus solely on the statutory language regarding the default status of the debt at the time of acquisition and not on other critical phrases within the statute seems problematic. The FTC brief argues that the word “currently” should have and could have been used by Congress to demarcate the instant circumstances. However, that argument ignores the present tense simplicity of the word “is.”  In my view, “is” carries with it a temporal quality. Moreover, the creditor definition is in the disjunctive “any person who offers or extends credit creating a debt OR to whom a debt is owed.” 15 USC § 1692a(4)(emphasis added). I would like to think the 11th Circuit got this right. To the extent there results a circuit split, perhaps SCOTUS will have to get involved or the statue could be clarified.

The FTC has a mission. That is clear. And it is an appropriate and important mission to protect consumers from unscrupulous practices. However, in this instance, it seems to me that the parade of horribles outlined in the amicus brief is a bit overstated. This ruling will not hamper government enforcement nor will it remove important consumer protections. Banking institutions that purchase portfolios of assets/accounts will continue to answer to their primary regulators including the CFPB regarding their operations and practices. To add to the regulatory enforcement risk crossfire, earlier this year, the CFPB initiated enforcement against an auto finance lender not covered by FDCPA alleging that certain debt collection activities, while not in violation of FDCPA, did violate CFPB UDAAP standards.

In a recent post on the FTC blog, Reilly Dolan, Associate Director, Division of Financial Practices, touted that the FTC has “fought to have 75 bad apples removed from the debt collection barrel.” The article also recognizes the power of self-regulation and compliance practices. Moreover, the FTC has been reaching out this year through a series of presentations called “Debt Collection Dialogues.” The stated purpose of the Dialogues is to foster understanding between businesses and the FTC regarding its enforcement approach and practices. For any one attending the upcoming September 29th Dialogue event in Dallas or the third Dialogue in Atlanta in mid-November, it might be interesting to raise this matter for discussion.  It seems that enforcement resources may be better utilized continuing to pursue “bad apple” players, not national associations.

Banking institutions who are acquiring consumer debt asset portfolios should be aware of the FTC’s amicus brief, as it illuminates the thought processes within the FTC span of control and enforcement. Should the FTC prevail in obtaining en banc review and overturning the ruling, the plaintiffs’ class action bar is sure to notice that development as well.