Supreme Court Justices Struggle With Terms In Case Which Will Decide If Debt Buyers Are Regulated As Debt Collectors Under The FDCPA

On April 18, 2017 the U.S. Supreme Court heard oral arguments in a case that could determine whether banks that purchase defaulted debt are regulated as debt collectors under the Fair Debt Collection Practices Act. The case is Henson et al. v. Santander Consumer USA Inc., case number 16-349, in the Supreme Court of the United States.

Santander was accused in a 2012 class action of violating the FDCPA by misrepresenting its authority to collect the debt, the amount of the debt owed and by communicating directly with consumers it knew were represented by counsel.

Santander moved to dismiss the case on the grounds that it did not qualify as a debt collector under the statutory definition because it had purchased the defaulted debt it was seeking to collect.  The district court agreed. The Fourth Circuit upheld the dismissal, and the consumers filed their petition for a hearing before the Supreme Court soon after. The consumers argue that Santander should be considered a debt collector even though it purchased the defaulted auto loans. Santander argues that because it owns the debts it should be treated as the original creditor and thus be exempt under the FDCPA.  

The FDCPA provides an exemption from its consumer protections, including restrictions on when third-party collectors can contact people to collect on debts, for banks that collect on loans that they issue. The Plaintiffs' attorney argued, however, that a debt buyer is like a debt servicer to whom a debt has been assigned for collection which Congress intended to be treated as a debt collector when it obtained that assignment after the debt was in default.

Justice Samuel Alito was skeptical of this reading of the FDCPA, stating that the statute’s language saying that its protections apply to third-party firms that collect on debt “owed or due another” clearly argued for Santander and similar firms to be exempted.  “You’re really going uphill on that. You need something really strong to overcome that, I would say,” Justice Alito said. 

Justice Elena Kagan, had similar trouble with the Plaintiffs' argument, given the the use of the word “owed” in the statutory exception to classification as a debt collector. “My problem when I think about this word is that I can never get it to mean what you want it to mean, no matter ... how I construct a sentence,” Justice Kagan said.

Chief Justice John Roberts conceded that Congress could not have contemplated the changes that have come to the debt collection industry when it wrote the FDCPA, seeming to indicate that that would be something that he would weigh.  “The industry has evolved in a way that has — has raised these sorts of questions,” he said. “This is not something that Congress was addressing.”

While the Plaintiffs' attorney spent much of his time trying to explain how the debt collection industry has changed, the Defendant's attorney argued that the FDCPA includes an exception for servicers that applies to debt that has not yet defaulted, and that should apply to servicing of loans that were transferred to another owner while in default.

But Justice Kagan had a problem  with that argument, asking: “What happened in between the time when your client serviced the debt and the time when your client purchased the debt that in any way changed its relationship with the borrower such that Congress wouldn’t be concerned any longer with its behavior?” 

We will monitor the Supreme Court's docket and update this blog when the Court issues its decision.