Big Victory for Debt Buying Industry: Supreme Court Holds That Debt Buyers Are Not “Debt Collectors” Under The FDCPA

The U.S. Supreme Court recently held in Henson v. Santander Consumer USA Inc., 582 U.S. ___ (2017), that a company may collect on debts that it purchased for its own account without triggering the statutory definition of “debt collector” under the Fair Debt Collection Practices Act. The unanimous decision penned by Justice Gorsuch, his first as a Supreme Court Justice, was a resounding victory for the debt buying industry, especially given ever increasing individual and putative class actions alleging violations of the FDCPA in the multibillion dollar debt collection industry.

The FDCPA authorizes private lawsuits and heavy fines to debt collectors who engage in unscrupulous collection practices. Under the Act, “debt collectors” are defined as anyone who “regularly collects or attempts to collect . . . debts owed or due . . . another.” 15 U.S.C. § 1692a(6). But because the practice of buying and managing consumer debt has become more commonplace, the issue of whether consumer finance firms who purchase consumer debt are included within the Act’s coverage was unclear.  While everyone agrees that the term embraced the repo man, the person hired by the creditor to collect an outstanding debt, it was unclear whether the person buying a debt and then trying to collect on it for himself made that person a debt collector. Circuit courts were divided on the issue, with some courts classifying debt buyers as creditors and other courts classifying them as debt collectors. In Henson, the Supreme Court resolved this Circuit split and held that debt buyers attempting to collect on that debt are excluded from the Act’s coverage because they do not qualify as debt collectors.

The complaint filed in the Henson case alleged that CitiFinancial Auto loaned money to the petitioners to finance the purchase of their cars. The petitioners defaulted on their loan and Santander later purchased the defaulted loans from the original lender, CitiFinancial Auto. After purchasing the defaulted loans, Santander engaged in collection practices that petitioners believed violated the FDCPA. The District Court and Fourth Circuit both ruled in favor of Santander on the ground that Santander did not qualify as a debt collector because it did not regularly seek to collect debts “owed . . . another,” but instead sought only to collect debts that it purchased and owned.

The Court explained that debt buyers are not subject to the FDCPA because the Act’s language only focuses on third-party collection agents. In its holding, the Court rejected petitioners’ argument that debt buyers are also debt collectors because of Congress’s use of the past participle of the verb “to owe.” Petitioners claimed that the statute’s definition of a debt collector includes anyone who regularly collects debts previously owed to another. Instead, the Court found that past participles are commonly used as adjectives to describe the present state of things, and that the word “owed” is used to refer to present debt relationships. As a result, the Court observed that the text of the statute indicates that one has to attempt to collect debts owed to another in order to qualify as a debt collector under the Act.

The Court also rejected petitioners’ alternative argument that the FDCPA treats defaulted debt purchasers as traditional debt collectors because doing so best furthers the spirit of the Act. Petitioners contended that if Congress had been aware of the business involving purchasing defaulted debt, then it would have included them as traditional debt collectors because they pose similar risks of abusive collection practices. The Court explained that it was not its job to rewrite a statute under the banner of speculation. Likewise, the Court found that petitioners’ policy arguments were not unassailable, because reasonable legislators could argue both ways on whether debt buyers should be treated as debt collectors under the Act. Certainly, the Court noted that these matters are for Congress to resolve, not the Supreme Court.

The Henson decision has far reaching implications on the debt collection industry and provides comfort to companies who purchase bad-debt and then go out to collect on it. Because the Henson decision reveals that debt purchasers are not defined as debt collectors under the FDCPA, Congress’s attempt to protect consumers from unfair or deceptive practices as a means to recoup money is severely weakened. The decision also clarifies that purchasers of defaulted debt now face less regulation in their collection process. Whether Congress decides to amend the FDCPA, and further regulate the debt collection industry, is something that the industry will keep a close eye on.