SubPrime Auto Finance News reconnected with Hudson Cook associate Anastasia Caton, who has been closely watching the Supreme Court mulling over whether a finance 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 newest member of the highest court, Justice Neil Gorsuch, wrote the opinion for the unanimous decision that determined Santander Consumer USA was not a “debt collector" subject to the FDCPA when it bought, held and then serviced on its own account consumer debts that were in default at the time of purchase. The Supreme Court’s actions affirmed the previous decision by the U.S. Court of Appeals for the Fourth Circuit.
“… the Act defines debt collectors to include those who regularly seek to collect debts ‘owed ... another.’ And by its plain terms this language seems to focus our attention on third party collection agents working for a debt owner — not on a debt owner seeking to collect debts for itself,” Gorsuch wrote for the court. “Neither does this language appear to suggest that we should care how a debt owner came to be a debt owner — whether the owner originated the debt or came by it only through a later purchase. All that matters is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for ‘another.’
“And given that, it would seem a debt purchaser like Santander may indeed collect debts for its own account without triggering the statutory definition in dispute, just as the Fourth Circuit explained,” Gorsuch went on to write.
The Supreme Court heard oral arguments in this case — Henson versus Santander Consumer USA — on April 19 and needed less than two months to render the decision. 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.
Anastasia Caton, Hudson Cook
Eventually, the creditor sold Henson’s outstanding deficiency to Santander Consumer USA and Santander began collecting Henson’s deficiency.
“I was a bit surprised by how quickly the ruling came out, and also surprised by the 9-0 decision, without even a concurring opinion that addressed policy issues,” Caton told SubPrime Auto Finance News this week. “But it was clear during oral argument that all of the justices were struggling with the consumer’s textual argument.
“By limiting the question presented to only addressing the part of the definition of ‘debt collector’ that includes persons who regularly collect debt that is ‘owed or due another,’ the Court had its hands tied with respect to how far it could go in bending the language of the statute,” she continued. “Had the Court considered the other part of the definition of ‘debt collector’ — a business with the principal purpose of collecting debts — I think we would have seen more deliberation and also a split.”
Any new opportunities?
Caton also addressed another question that might be on executives’ minds. What kinds of opportunities might this ruling open up for auto finance companies to do with their negative paper? Caton began by noting how Santander is a different player in the space than some other operations that originate vehicle installment contracts.
Caton acknowledged the decision was indeed “a victory” for a company such as Santander. One of the reasons why is became its business includes not just the collection of consumer debts, but also origination and consumer banking.
“Traditional debt buyers will still be proceeding with caution, and likely will not change course with respect to FDCPA compliance in light of the decision,” she said.
Caton also explained that the Supreme Court “made clear” that there are two alternate definitions of debt collector. Those definitions are:
Entities collecting debts owed or due another (third party debt collectors)
Entities engaged in a business the principal purpose of which is the collection of debt.
“The Court consistently pointed out that it was only deciding whether Santander was collecting debts owed or due another, and was not deciding whether Santander was engaged in a business the principal purpose of which is the collection of debt,” Caton said.
“I would not be surprised if we saw litigation soon where the consumer alleges that the purchaser of a delinquent account (whether it is a traditional debt buyer or, the more difficult case, a traditional financial services firm) is a debt collector under the principal purpose prong of the definition,” she continued.
Caton reinforced her point by referencing the reaction by the Receivables Management Association (RMA), a trade group that represents debt buyers. That organization emphasized that the Supreme Court decision still leaves uncertainty about debt buying companies that purchase and actively collect on their own debt.
“While all judicial decisions are based on the facts contained in the case, it is conceivable that the Santander decision may be used by debt buying companies that operate solely as an investment vehicle and do not engage in any debt collection activity themselves (aside from acquisition) to argue they are not subject to FDCPA regulation,” the association said in a news release. “However, RMA would urge all companies that operate under either the active or passive business model to consult with legal counsel before making any operational changes.
“In the end, RMA does not see the Santander decision as lessening the consumer protections required of its membership due to the rigorous requirements of RMA’s Receivables Management Certification Program (RMCP). RMA estimates that over 80 percent of consumer receivables in the United States that have been sold on the secondary market are owned by companies who are RMCP certified and thereby bound by standards that already go above and beyond the requirements of the FDCPA,” the organization went on to say.
While Caton isn’t expecting a flood of new debt buyers to appear suddenly, she considered what more traditional financial services companies like banks could do now.
“(The decision) might allow the inclusion of more negative paper from sales finance companies in portfolio purchases, heating up competition for such paper,” Caton said. “However, banks could decide that the risk of an adverse ruling on the “principal purpose” prong of the definition of “debt collector” is too high and might continue to avoid purchasing delinquent accounts.”
Furthermore, Caton raised the possibility of what could happen if lawmakers become more involved in debt-collection matters.
“Another thing to keep in mind is that states can always enter this space to regulate where Congress fails to do so. State legislatures tend to be more nimble than the federal legislature,” Caton said. “In response to the proliferation of the debt buying industry, numerous states have stepped in over the past few years to pass legislation expressly regulating debt buyers.
“If that trend continues to spread, we could see further consolidation of the debt buying industry as the cost of multi-jurisdictional compliance becomes overly burdensome for smaller players,” she continued. Further, the CFPB still has UDAAP authority and the FTC still has UDAP authority over entities that purchase defaulted debt and try to collect from consumers.”
Decision in historical context
SubPrime Auto Finance News also asked a question other industry participants might be wondering, too. Had the result gone the opposite way, what kind of additional burdens might have been placed on auto finance companies?
“Had the result gone the opposite way, and the Court ruled in favor of the consumer, I think we would have maintained the status quo,” Caton said. “I do not think the market for negative auto finance paper would have moved that much.
“Before this case, the majority of federal appellate courts to address the issue, the CFPB, and the FTC all interpreted the FDCPA to apply to purchasers of defaulted debt,” she continued. “As a result, most purchasers of defaulted debt had already been complying with the FDCPA.
Finally, Caton considered where this Supreme Court decision ranks in important court victories for the auto finance industry.
“The decision is certainly significant because it narrows the scope of the FDCPA’s coverage, and eases the FDCPA risk for a narrow sub-group of portfolio buyers that are not ‘debt buyers,’ but who also service their own accounts in their own names. But the decision in Henson is not an industry game-changer,” Caton said.
“The narrow sub-group of portfolio buyers that are not ‘debt buyers’ will likely have a modest impact on the market for negative auto finance paper, and the Court could still decide that those entities are subject to the FDPCA because they are engaged in a business the principal purpose of which is the collection of debt,” she concluded.