Editor's note: This story was originally featured in the January issue of DS News, out now.
The United States Supreme Court, in Henson v. Santander Consumer USA Inc., settled a circuit court split and solidified what may turn out to be a large exemption from the rigors and risks associated with debt collection under the Fair Debt Collection Practices Act (FDCPA).
A bank purchased defaulted loans and then sought to collect on that debt themselves, as opposed to hiring a third-party debt collection agent, ultimately resulting in a dispute as to whether FDCPA violations had occurred.
The FDCPA defines debt collectors as any person whose business’s “principal purpose” is the collection of debt or who “regularly collects or attempts to collect … debts owed … another.” In Henson, the purchasing bank was not alleged to have a “principal purpose” of debt collection, which left only the second part of the debt collection definition in dispute. Focusing on this latter language, the court ruled that an FDCPA “debt collector” does not include defaulted debt purchasers who seek to collect on those debts themselves (rather than using a third party), as they are not seeking to collect debts “owed … another.”
The court stated that, under the statute, it didn’t appear to matter how a debt owner became a debt owner—i.e., it didn’t matter whether the owner originated the debt or purchased it later. Moreover, the court was unconcerned with the fact that the bank had purchased defaulted debts, as opposed to debts prior to default. The main consideration was simply whether the debt collection was for one’s own debt, or for another’s.
The court further tackled the FDCPA’s rather confusing interplay of the terms “creditor” and “debt collector.” The distinction is important because although debt collectors are subject to the FDCPA, creditors generally are not. Those aligned with the petitioners argued that “debt collector” and “creditor” are mutually exclusive under the FDCPA. Therefore, so the argument goes, if under the FDCPA one must either be a creditor or a debt collector (not both), and those seeking to collect defaulted debts are excluded from the creditor definition, then the collection of defaulted debts necessarily must fall into the debt collector category. In other words, the collection of defaulted debts has to qualify as “debt collection” under the FDCPA because it’s excluded from the creditor category.
However, in disagreeing with this argument, the court pointed out that the FDCPA’s creditor definition only excluded debt assigned in default when the debt was transferred “solely for the purpose of facilitating collection for another.” The court concluded that “a company collecting purchased defaulted debt for its own account … would hardly seem to be barred from qualifying as a creditor under the statute’s plain terms.” Therefore, the court emphasized again that the main focus has to be whether the debt collection is for oneself, or for another—not the debt’s default status. In so ruling, the court overturned decisions out of both the 7th and 3rd circuits that had limited their analyses to the default status of the debt obtained, rather than whether the collection was occurring for another.
Petitioners also argued that the business of purchasing defaulted debt needed the same rules applied to independent debt collectors, as “no other result would be consistent with the overarching congressional goal of deterring untoward debt collection practices.” In response, the court stated that Congress hadn’t had the chance to consider what should be done about those in the business of purchasing defaulted debt, since the market for defaulted debt developed after the FDCPA’s 1977 passage. And, in refusing to consider policy considerations, the court stated that “… it is never our job to rewrite a constitutionally valid statutory text under the banner of speculation about what Congress might have done had it faced a question that, on everyone’s account, it never faced.” Instead, the court reiterated that it is the judiciary’s job to apply, not amend legislation, and that “[the] legislature says…what it means and means…what it says.”
Given the court’s analysis, a servicer may be categorized as a debt collector when collecting debts on behalf of an investor, since it would be attempting to collect the debt owed another. In fact, at least one court has already similarly ruled. Therefore, to avoid the debt collector moniker and safely reap the benefits of the court’s decision, a servicer would need to be collecting on debts wholly owned by the servicer itself.