COMMENT: This opens the door for all buyers of defaulted debt to work the system to their greatest advantage (including fraud and forgery), and it is aimed specifically to protect the buyers of defaulted mortgage debt. Remember, a holder in due course has rights afforded to it because the note is taken without evidence of default. Defaulted debt that has been SOLD TO A DEBT BUYER typically carries no security interest. It’s the res (real property) that they’re coming for.
In a significant decision for banks and the lending industry as a whole, the United States Supreme Court recently clarified that purchasing and collecting defaulted debt does not make an entity a “debt collector” under the Fair Debt Collection Practices Act (“FDCPA”). See Henson v. Santander Consumer USA Inc., 2017 WL 2507342 (U.S. June 12, 2017). In the case, plaintiffs received and later defaulted on auto loans from CitiFinancial Auto. Santander bought the defaulted debt on these loans from CitiFinancial and attempted to collect for itself. Plaintiffs sued Santander alleging that its collection efforts violated the FDCPA, which defines a “debt collector” as “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” See 15 U.S.C. § 1692a(6). Santander moved to dismiss on the grounds that it did not qualify as a debt collector pursuant to the FDCPA because it did not meet the definition of one who “regularly collects or attempts to collect . . . debts owed or due . . . another” because it was the owner of the debt. See 15 U.S.C. § 1692a(6). Thus, Santander argued, the FDCPA was inapplicable. The district court dismissed the case, finding that Santander was not a debt collector and the United States Court of Appeals for the Fourth Circuit affirmed.
In a unanimous opinion delivered by Justice Gorsuch, the Supreme Court affirmed the Fourth Circuit. The Court held that once Santander purchased the debt, it was collecting its own debt and, therefore, was not a debt collector as defined under the FDCPA. The Court focused on the language of the statute in determining that the key difference was whether the entity was collecting for one’s own account or for the account of “another.” Because it owned the debt outright, Santander was not collecting debts on behalf of “another” and did not fall into the definition of a “debt collector” under the FDCPA. Advancing public policy arguments, petitioners claimed that “[h]ad Congress known this new industry [of defaulted debt purchasers] would blossom . . . it surely would have judged defaulted debt purchasers more like . . . independent debt collectors.” The Court responded to these arguments by stating that it was “the proper role of the judiciary . . . to apply, not amend,” the statutes passed by Congress. As a result, the Court found that the FDCPA was inapplicable.
This decision clarified a circuit split that existed over the correct characterization of entities that purchased defaulted debts. Some courts, including the Third Circuit, had held that parties that purchased debt and attempted to collect it on their own behalf were “debt collectors” subject to the FDCPA. See FTC v. Check Investors, Inc., 502 F.3d 159 (3d Cir. 2007) (“one attempting to collect a debt is a ‘debt collector’ under the FDCPA if the debt in question was in default when acquired.”). The Supreme Court’s decision provides much needed clarity and added protection for lenders from the never-ending stream of FDCPA actions filed by the plaintiffs’ bar.