U.S. Supreme Court To Decide If Debt Buyers Are Considered Debt Collectors Under the FDCPA

Are debt buyers which regularly attempt to collect the debts they purchase after the debts have fallen into default considered “debt collectors” subject to the Fair Debt Collection Practices Act?  On January 13, 2017, the U.S. Supreme Court took an appeal from the Fourth Circuit U.S. Court of Appeals which should answer this question.  The case is Henson v. Santander Consumer USA, Inc., S.C. Case  No. 16-349

Ricky Henson defaulted on a retail installment sale contract secured by a vehicle. A deficiency remained after Henson's creditor repossessed and sold his car and applied the sale proceeds to the balance. The creditor subsequently sold Henson's deficiency to Santander Consumer, USA, Inc., which attempted to collect the deficiency. Henson then sued Santander under the FDCPA. Santander filed a motion to dismiss arguing that it was not a debt collector under the FDCPA because it was collecting the debt on its own behalf, and not on behalf of a third party. Santander argued that because it owned the debt, under the FDCPA it was a "creditor" as opposed to a "debt collector." The U.S. District Court for the District of Maryland agreed with Santander and granted the motion.  Henson appealed.

The Fourth Circuit Court of Appeals Court of Appeals affirmed the district court's decision. The Court first considered the definitions of "creditor" and "debt collector." The Court held that an entity could be considered a "debt collectors" if: (a) the principal purpose of the entity is to collect debts; (2) the entity regularly collects or attempts to collect debts owed or due or asserted to be owed or due to another; and (3) the entity is a creditor that, in the process of collecting its own debts, uses a name other than its own. Henson never alleged that Santander's principal purpose was debt collection. Further, the record established that Santander had used its own name to collect, and therefore was not a creditor collecting under a different name. Accordingly, the Court noted that the only way Santander could be a "debt collector," was if it "regularly collect[ed] debts owed to another."

The court found the material distinction between a "debt collector" and a "creditor" to be whether the entity "regularly collects" on behalf of a third party. The court found Santander to be a creditor as opposed to a debt collector because it was collecting debts on its own behalf, and because its regular business included activities other than debt collection, including origination and non-default servicing activities.   

As a result of this decision the Fourth Circuit joined the appellate courts of the Ninth and Eleventh Circuits. Appellate courts in the Third, Fifth, Sixth, and Seventh Circuits, and the District of Columbia Court of Appeals hold opposing views, having found purchasers of defaulted debts to be "debt collectors" under the FDCPA. The Consumer Financial Protection Bureau and Federal Trade Commission also consider debt buyers are FDCPA regulated "debt collectors."

Hopefully the Supreme Court will resolve this conflict and bring much needed clarity to this area of the law.