Hudson Cook associate Anastasia Caton observed last week’s oral arguments during a crucial debt collection case in front of the Supreme Court that might make third-party efforts within auto finance significantly more difficult depending which way the nine justices rule.

To recap, the nation’s highest court will decide whether a company that regularly attempts to collect debts it purchased after the debts had fallen into default is a “debt collector” subject to the Fair Debt Collection Practices Act (FDCPA).

The matter involves the Supreme Court opting to hear the appeal of a debtor from a decision by the U.S. Court of Appeals for the Fourth Circuit. Caton previously explained that the case began when consumer Ricky Henson defaulted on a retail installment sale contract secured by a vehicle. After the original creditor repossessed and sold Henson's vehicle and applied the net proceeds to the balance, Caton noted a deficiency remained.

Eventually, the creditor sold Henson’s outstanding deficiency to Santander Consumer USA and Santander began collecting Henson’s deficiency

With that situation as the foundation for oral arguments, Caton described her overall assessment of how the proceedings unfolded in a message to SubPrime Auto Finance News.

“The proceeding seemed to focus heavily on the textual arguments — likely because counsel for the consumers used a creative argument for interpreting the FDCPA to apply to debt buyers,” Caton said.

“Counsel for the consumers argued that the definition of ‘debt collector’ — essentially, any person who regularly collects debts owed or due another — means that a company is a debt collector if it collects debts that were at one time owed to another person, or that are currently due to the company,” she continued.

“Several of the justices, including both (Samuel) Alito and (Elena) Kagan, seemed to agree that this interpretation of the definition of ‘debt collector’ involved an exercise in mental gymnastics,” Caton went on to say.

Caton asserted the textual arguments tend to support Santander’s claim that an entity that collects debt that it owns is not a “debt collector.”

She then added, “But, Justice (John) Roberts readily acknowledged that at the time the FDCPA was enacted, the debt buying industry as we know it did not exist.”

SubPrime Auto Finance News asked Caton if she could pinpoint what justice’s questions gave the most insight into how the high court is approaching this matter and how it might eventually rule. She circled back to the actions by Kagan and Alito, surmising that these two high court members seemed to agree that the consumers’ textual argument is weak.

“But no one mentioned that if there is a hole in the plain language of the statute as a result of changes in the industry, then Congress should amend the statute,” Caton said.

Caton also mentioned the focus both Kagan and Ruth Bader Ginsburg took regarding the consumers’ policy argument. Caton explained that under Santander’s interpretation of the FDCPA, a debt collector servicing accounts on behalf of a third party could simply buy those accounts to evade application of the FDCPA. 

“(The justices) seemed to acknowledge that this is a problem that Congress could not have foreseen or intended at the time it drafted the FDCPA,” Caton said.

Caton added one more point regarding how the justices’ behavior might give an indication of how the Supreme Court might rule before its current term culminates this summer.

“The one thing that was absolutely clear from oral argument is that it will be a high hurdle for the court to overcome the plain language of the statute — notwithstanding that the majority of circuit courts to review this issue have found that debt buyers are ‘debt collectors’ subject to the FDCPA,” she said.

Depending on the result, SubPrime Auto Finance News asked Caton to project what might the ramifications be on the auto finance industry as well as the debt collection space.

Caton began by noting many of the largest debt buyers, relying on the majority of circuit courts, which have held that the FDCPA applies to debt buyers, already comply with the FDCPA. 

Further, she added the Consumer Financial Protection Bureau has indicated in preliminary rulemaking materials promulgated under the FDCPA that it believes that debt buyers are subject to the FDCPA. 

“So, if the court does rule in favor of the consumers, we likely will not see a huge impact on the debt buying or third party collection industries,” she said.

If the court decides that the statute does not apply to debt buyers, Caton predicted shifts in the third-party collection market and the debt buying/selling market. 

“Many third party collectors will probably move to purchasing accounts outright,” she said. “More debt buyers will enter the market in the absence of the high compliance burden hurdles posed by the FDCPA.

“As a result, the debt sales market will likely become more competitive for auto finance companies trying to sell off old deficiency balances, but creditors might also have a harder time finding third parties to service delinquent accounts,” Caton continued.

Caton touched on another potential ramification if a decision goes in Santander’s favor. She sees an impact on state collection agency and debt collection laws that have adopted the FDCPA’s definitions, and, in the absence of definitive state regulator or case law guidance, rely on FDCPA jurisprudence. 

In fact, Caton pointed out attorneys general from 28 states and the District of Columbia joined in an amicus brief supporting the consumers’ argument that debt buyers are debt collectors. 

“Perhaps the most significant impact of a decision in Santander’s favor would be Congress revising the FDCPA to remove any doubt that it clearly applies to debt buyers. The court very well could signal to Congress in its opinion that it should do just that,” Caton said.