The note buyer industry got some clarity this year with a Supreme Court ruling made in February.
Henson et al. v. Santander Consumer USA Inc. declared once and for all that loan originators such as a note buyers are NOT considered debt collectors and therefore are not bound by the Fair Debt Collection Practices Act.
So where was the confusion here? What led up to this decision and what does it mean? Let’s take you through it.
What Is the FDCPA?
The Fair Debt Collection Practices Act was enacted in 1977 and was meant to curb predatory practices in the debt collection industry.
Essentially, it bans debt collectors from harassment and from lying to borrowers about what is owed and the consequences of default.
Among practices banned by the Act:
- Accusing borrowers of a crime
- Using threatening or profane language
- Misrepresenting the legal status of forms sent to borrowers
- Harassing debtors over the phone
- Publishing lists of people who owe money
The important thing to keep in mind in terms of the FDCPA, however, is the definition of a debt collector. A debt collector, under the terms of the FDCPA, is a third party that attempts to collect a debt for someone else.
This was the key point of the case. The petitioners contended that the respondents were debt collectors, and therefore governed by the regulations of the FDCPA.
Henson v. Santander
A little background on this case:
Santander Consumer USA is a car loan company. They originate new car loans, used car loans, and refinance loans. They also, and this is the important bit, buy defaulted loans from other financial institutions.
Several years ago, Santander Consumer USA bought a few defaulted car loans from CitiFinancial. They then did what any loan originator would do and attempted to collect on those loans.
Upon trying to collect on the debts, Santander found itself hit with a lawsuit alleging that it was violating the FDCPA.
The petitioners, referred to in the case as Ricky Henson et al, contended that Santander had originally been hired by CitiFinancial to collect on the debts, before purchasing the defaulted loans themselves. They further contended that CitiFinancial had been in the process of waiving the debts on the auto loans, pending final court approval, and that Santander’s purchase and attempt to collect on the debts violated the FDCPA.
The crux here, and the key point the entire case hinged upon, is the definition of the word “debt collector”. If, as the petitioners claimed, Santander Consumer USA qualified as a debt collector, their actions would, conceivably, be in violation of the FDCPA.
However, Santander asserted that they were a debt buyer, not a collector and that collecting on debt that was now owed to themselves was not governed by the FDCPA.
In layman’s terms, because Santander Consumer USA had purchased the debt, they asserted it was now theirs to do as they pleased, and they were not bound by any agreements or promises made by CitiFinancial prior to the purchase.
The Supreme Court came down firmly on the side of the respondent in this one, ruling in a 9-0 decision that debt buyers and debt collectors are not the same and the former is not governed by the FDCPA.
This was Justice Gorsuch’s first published opinion, and he hinted that while the Supreme Court had interpreted the law in this way, Congress was certainly within their rights to change or amend the law, should the need arise. More on that later.
So What Does It Mean?
The distinction between a debt collector and a debt buyer seems like a trivial one, perhaps. After all, debt is debt, no? Certainly to the debtor, it may seem that way.
In reality, though, this ruling is crucial in regards to how a note buyer or other debt buyers define themselves and do business.
The purpose behind this suit was to impose the regulations of the FDCPA onto any holder of any debt that has ever been owned by another person, regardless of whether the person who currently holds the debt is collecting for themselves or for the original owner.
This is good news for note buyers and other loan buyers because it means they have several fewer regulations to worry about and don’t run the risk of litigation should they attempt to collect on loans that defaulted under primary owners.
Now, remember Justice Gorsuch’s opinion that we mentioned earlier? He was very careful to mention in his opinion that “…it’s hardly unknown for new business models to emerge in response to regulation, and for regulation in turn to address new business models. Constant competition between constable and quarry, regulator and regulated, can come as no surprise in our changing world. But neither should the proper role of the judiciary in that process — to apply, not amend, the work of the People’s representatives.”
The long and short of this is that while Justice Gorsuch appears to believe that the Supreme Court has interpreted the law correctly, noting that the law was specifically speaking to debt collectors, not those who purchase debts to collect for themselves, he is saying that it is within Congress’s scope of responsibility to revise the law or create new legislation that governs debt buyers.
This is not an edict or command for Congress to take action, and with everything else sitting on the Hill just at the moment, it is unlikely that new legislation will be created anytime soon. But, as with any decision that affects the note buyer industry, it’s important to keep Justice Gorsuch’s statement tucked away, should Congress decide to act upon it at a later date.