SCOTUS to Decide Whether Entity is FDCPA ‘Debt Collector’ Merely Because It Purchases Defaulted Debt

The Supreme Court of the United States recently decided that it will review the decision of the U.S. Court of Appeals for the Fourth Circuit in Henson v. Santander Consumer USA, Inc.

As you may recall from our prior update, the U.S. Court of Appeals for the Fourth Circuit held that the fact that a debt is in default at the time it is purchased by an entity does not necessarily make that entity a “debt collector” subject to the federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692 et seq.

A link to the docket is available here:  Link to Docket.

The plaintiff consumer filed a petition for a writ of certiorari with the Supreme Court of the United States, asking the Court to resolve a “deep, mature circuit conflict that has only become more entrenched with time.” The conflict refers to a circuit split over whether a creditor, such as a bank or finance company, collecting on a debt acquired in default is a “debt collector” subject to the FDCPA.

As you may recall, the FDCPA generally governs the activities of “debt collectors,” not “creditors.” Under the definition provided in the FDCPA, the following are defined as debt collectors:

  • Any person whose principal purpose is to collect debts;
  • Any person who regularly collects debts owed to another; or
  • Any person who collects its own debts, using a name other than its own.

The FDCPA also provides that a person is not a debt collector if that person is “collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity concerns a debt which was not in default at the time it was obtained by such a person.”

The FDCPA defines a “creditor” as:

  • Any person who offers or extends credit creating a debt; or
  • Any person to whom a debt is owed.

But the FDCPA further provides that a person is not a creditor if that person “receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another.”

The Fourth Circuit, along with the Ninth and Eleventh Circuits, has held that an entity is not a debt collector unless its principal purpose is to collect debt, it regularly collects debts owed to another, or it is collecting debt using a name other than its own.

In these circuits, if the entity does not meet the definition of a “debt collector” under one of those three tests, then it matters not that the entity is excluded from the definition of a “creditor” on the basis that the debt in question was in default at the time it was acquired. As the Eleventh Circuit put it, the exclusion from the definition of “debt collector” is not a “trap door” and it should not be “interpreted to bring entities that do not meet the definition of ‘debt collector’ within the ambit of the FDCPA solely because the debt on which they seek to collect was in default at the time they acquired it.”

The Fourth, Ninth, and Eleventh Circuits also reject the argument that an entity that takes assignment of debts in default is regularly collecting debts owed to another because the debts were owed to a different creditor at the time of default.  Under this view, as long as the entity is not collecting using a name other than its own, an entity taking assignment of accounts in default is not a “debt collector” because its principal purpose is not to collect debt, nor does it regularly collect debts owed to another.  But, under this view, a debt buyer is a “debt collector” if, for instance, the debt buyer’s principal purpose is to collect debt.

On the other side of the circuit split, the Third, Sixth and Seventh Circuits have focused on the exclusions from the definitions of “debt collector” and “creditor;” and reasoned that an entity that takes assignment of a debt in default is a debt collector, while an entity that takes assignment of a debt that is not in default is a creditor with respect to that debt. The Seventh Circuit explained that “[i]f the one who acquired the debt continues to service it, it is acting much like the original creditor that created the debt. On the other hand, if it simply acquires the debt for collection, it is acting more like a debt collector.”

Also, both the CFPB and the FTC have adopted the view that the default status of the debt at the time of acquisition determines whether the entity is a “creditor” or a “debt collector.” The CFPB took this approach in a recent consent order with a large bank, finding that the bank violated the FDCPA by failing to send validation notices on student loan accounts that were in default at the time they were acquired from another bank.

In an amicus brief, the FTC urged the Eleventh Circuit to find that a bank that acquired a portfolio of credit card accounts from another bank was a “debt collector” with respect to those accounts that were in default at the time of acquisition.

With the CFPB working to promulgate rules for first- and third-party collectors, finance companies, banks and other companies will be looking to the Supreme Court for clarity on whether they will be considered FDCPA debt collectors with respect to accounts that are in default at the time they are acquired from other lenders.

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Brent Yarborough practices in Maurice Wutscher's Birmingham office in its Appellate, Commercial Litigation, Consumer Credit Litigation and Regulatory Compliance groups. He has substantial experience representing financial institutions, debt buyers and law firms. He has defended cases involving the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, the Truth In Lending Act, and various state law claims asserted against lenders and their assignees. He has also provided compliance advice on matters related to the FDCPA, UDAAP, and state debt collection laws. He is a frequent speaker to national audiences and publishes on topics related to consumer financial services regulation and litigation. For many years Yarborough has served on the Executive Board of the Birmingham Bar Association’s Bankruptcy and Commercial Law Section. He also serves on the Legislative Task Force of the Creditor Attorney Association of Alabama and is the immediate past president of the Birmingham-Southern College National Alumni Association. In October 2015, he was elected Secretary of NARCA – The National Creditors Bar Association, after serving on its Board of Directors for the previous eight years. In addition, he chairs NARCA’s Government and Regulatory Affairs Committee. Yarborough earned his B.A., cum laude, from Birmingham-Southern College and his J.D. from Cornell University, where he was Secretary/Treasurer of the Cornell Law School Moot Court Board.