Yesterday, the U.S. Supreme Court released an opinion highly anticipated by consumer lawyers as well as the debt collection industry, in the case of Henson v. Santander Consumer USA, Inc. This case dealt with the question of whether a purchaser of defaulted debts, which then attempts to collect those debts from consumers, counts as a “debt collector” that is subject to strict consumer protections provided in the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. (“FDCPA”).
To grasp the potential impact of this case, one needs to understand the structure of the consumer debt collection industry as it exists today:
The first step is origination, when the consumer first incurs a debt to a creditor such as a bank, credit card issuer, other lender, wireless provider, or cable company.
When the consumer defaults on a debt–usually by failing to pay–one of two things may happen: (1) the original creditor may hire a third-party debt collection company to attempt to collect the debt, generally through telephone calls and collection letters; or (2) the original creditor may attempt to collect the debt itself for some period of time.
Often, once the debt becomes sufficiently aged, the creditor sells, or assigns, the debt to a debt buyer. The debt buyer pays the creditor only a fraction of the face value of the debt, then attempts to recover as much of the debt as possible from the consumer by various means, often including telephone calls and collection letters.
The final stage in the process is a lawsuit filed by collection attorneys acting on behalf of the debt buyer. Most of these lawsuits are not contested, and result in default judgments that are slowly collected through wage, bank account, and tax refund garnishments.
It has long been settled law that, under the FDCPA, third-party debt collection companies and collection attorneys ARE “debt collectors.” Most federal courts found that debt buyers were “debt collectors” as well, including the United States Court of Appeals for the Sixth Circuit, which establishes precedent for federal courts in Michigan. Generally, circuit precedent found that creditors collecting their own debts could NOT be “debt collectors” unless a rare exception applied.
All of this matters for one basic reason: the FDCPA restricts what “debt collectors” are allowed to do, and creates powerful remedies for consumers when they do not comply with the FDCPA. The FDCPA creates various protections for consumers; for example, it requires debt collectors to identify themselves as debt collectors in communications to consumers, disallows certain conduct in collection lawsuits, outlaws attempts to collect debts no longer owed, limits consumer harassment by telephone, and disallows unfair and fraudulent conduct in connection with debt collection. Consumers harmed by violations of the FDCPA are entitled to sue, and can recover a statutory penalty as well as their attorney fees.
In yesterday’s Santander decision, the Supreme Court unanimously held that debt buyers are not automatically “debt collectors” subject to the FDCPA. According to the opinion, penned by newest Justice Neil Gorsuch, this is so because debt buyers are attempting to collect a debt that is owed to them, and thus are creditors, even though they are not the original creditors.
Taken in isolation, the Santander holding might seem catastrophic for consumers besieged by collection attempts from debt buyers (including such large players as Midland Funding, LVNV Funding, Portfolio Recovery Associates, and others), because the protections of the FDCPA would be unavailable. This would enable debt buyers to use, with impunity, the same harassing and unfair collection methods that “debt collectors” are not allowed to use under the FDCPA. It is true that the Santander decision is beneficial to some debt buyers at the expense of consumers; however, its impact is limited. Justice Gorsuch carefully points out in the opinion that the court’s decision does NOT mean that debt buyers are NEVER “debt collectors.” Indeed, the text of the FDCPA appears clear that debt buyers ARE “debt collectors” if their “principal purpose … is the collection of any debts.” 15 U.S.C. § 1692a(6). With respect to the largest buyers of defaulted credit card debt–i.e., Midland Funding, LVNV, and PRA–an experienced consumer lawyer should easily be able to prove that their “principal purpose” is debt collection; and they are therefore “debt collectors” subject to FDCPA restrictions.
While the Santander decision does not make the consumer advocate’s job easier, and is likely to spur pernicious innovations in the debt buying and debt collection industry, it is hardly the death knell for the FDCPA. Consumer advocates and watchdogs, including us at Westbrook Law PLLC, will continue to find ways to keep abuses in check.