The U.S. Supreme Court will hear oral argument in a case to decide whether purchasers of defaulted debt are governed by the federal Fair Debt Collection Practices Act (FDCPA) on April 18, 2017. See Henson v. Santander Consumer USA, Inc., 817 F.3d 131 (4th Cir. 2016) (U.S. Supreme Court No. 16-349). This case is important because the Supreme Court could eliminate a significant source of consumer class action litigation against many consumer finance companies, and because it affects state regulation and enforcement regarding debt collection.
FDCPA Covers "Debt Collectors" and Circuit Split
The federal FDCPA regulates the conduct of "debt collectors" in order to protect consumers. See 15 U.S.C. § 1692 et seq. For example, the Act imposes certain notice requirements on debt collectors, restricts the times and places that debt collectors can contact consumers, and forbids false or misleading representations, harassment, abuse, and unfair practices in the course of debt collection. The Act authorizes a private right of action for consumers, as well as statutory damages. However, it has not always been clear to courts across the country who qualifies as a "debt collector" subject to the Act.
The Act's definition of "debt collector" includes not only (1) those whose "principal" business purpose is debt collection, but also (2) one "who regularly collects or attempts to collect" debts that are "owed or due another." § 1692a(6) (emphasis added). On its face, that second prong may seem limited to third-party service providers who collect debt for other entities that actually own the debt. However, the statute exempts collecting "debt which was not in default at the time it was obtained." § 1692a(6)(F) (emphasis added). To some, this means that purchasing debt that is already in default makes the exemption inapplicable and triggers FDCPA requirements, as long as the debt was initially "due another" when it was originated. Supporters of this view, including consumer advocates, argue it is consistent with the Act's purpose of protecting debtors from those who, unlike original creditors, have no ongoing relationship with debtors and no incentive to treat them well.
In Henson, the defendant is a consumer finance company that was initially servicing (and therefore collecting) debt in default due another, but then purchased that defaulted debt, allegedly "for a few cents on the dollar." The Fourth Circuit held that once the company purchased the debt, it was no longer collecting debt "due another," and therefore was no longer a debt collector subject to the FDCPA. The Ninth and Eleventh Circuits have also adopted that view. Conversely, the Third, Fifth, Sixth, and Seventh Circuits and the D.C. Court of Appeals have adopted the opposite view.
Impact on State Regulation and Enforcement
More than half of the nation's state attorneys general filed an amicus brief shedding important light on how this decision also affects state regulation and enforcement activity regarding debt collection. In particular, the state attorneys general assert that if the Supreme Court excludes buyers of defaulted debt from the definition of "debt collector" under the FDCPA, it will create "regulatory voids" across the country for several reasons.
To begin with, some states have not enacted any comprehensive state law governing debt collection practices, and they rely exclusively on the federal FDCPA to protect their consumers. Other states have their own debt collection laws, but have expressly linked their scope to that of the FDCPA. Even in states with debt collection laws that are not expressly linked to the FDCPA, state courts have still treated interpretations of the FDCPA as persuasive authority on the correct interpretation of state debt collection laws. Furthermore, state debt collection laws were crafted with varying remedies, and some are narrower than what the FDCPA provides. For example, not all state debt collection laws authorize a private right of action for consumers and statutory damages like the FDCPA does.
The state attorneys general also note the practical enforcement implications if the FDCPA does not cover buyers of defaulted debt. They argue that debt buyers are difficult targets for state enforcement because they are often large national companies with deep pockets, harassing consumers across state lines. In the view of state attorneys general, the ability to coordinate with other states and pool resources is critical to effective enforcement, but would be undermined if there is no uniform legal standard to apply.
Although the state attorneys general prefer a nationally uniform rule through which the FDCPA covers buyers of defaulted debt, they recognize that the FDCPA provides a floor, not a ceiling, and that states can implement debt buyer laws and regulations of their own. Thus, even if the Supreme Court rules that certain debt buyers are not subject to the FDCPA, states will still remain free to impose debt buyer laws and regulations across the country on a non-uniform basis.
Related articles and presentations:
Navigating the New Federal and State Debt Collection Enforcement Landscape
CFPB Continues to Build Case for Planned Debt Collection Rules
Debt Collection Rulemaking: Proposal Highlights and Key Dates