Trying Times for Secondary Market for Consumer Debts

Those engaged in the business of selling consumer debt or of purchasing delinquent consumer debt for collection purposes are well-advised to take heed of the recent developments on the judicial and legislative fronts that have the potential to significantly affect their business.

Last week, the Supreme Court heard arguments in Henson v. Santander Consumer USA, Inc., # 16-349 (Sup. Ct.), the second of two cases this term involving interpretation of the federal Fair Debt Collection Practices Act (FDCPA).[1]  The question presented by Henson is whether the FDCPA applies to the collection practices of an emerging industry of “debt buyers” - companies that purchase defaulted consumer debts in the secondary market.  Because the business of buying and selling defaulted debt did not exist when Congress enacted the FDCPA in 1977, Congress did not expressly address debt buyers when it defined the term “debt collector.”  Accordingly, courts have wrestled with the FDCPA’s application to debt buyers in recent years. 

In Henson, four Maryland consumers (the Petitioners) contend that Santander Consumer USA, Inc. (Santander) violated the FDCPA by engaging in prohibited collection practices when collecting on Petitioners’ automobile loans.  Henson v. Santander Consumer USA, Inc., 817 F.3d 131, 133 (4th Cir. 2016).  Petitioners’ loans were originated by CitiFinancial Auto.  Id.  When Petitioners defaulted on their payment obligations, Citi Financial Auto repossessed and sold their vehicles leaving Petitioners obligated to repay deficiency balances.  Id. at 134.  CitiFinancial Auto then sold petitioners’ defaulted loans to Santander as a part of a $3.55 billion investment bundle of loan receivables.  Id. 

Santander moved to dismiss the Petitioners’ complaint on the ground that its allegations failed to establish that Santander qualified as a “debt collector” subject to liability under the FDCPA.  The U.S. District Court for the District of Maryland granted the motion, dismissed the action and denied reconsideration, noting that the FDCPA applies to “debt collectors” as defined in the FDCPA, not to “creditors collecting debts in their own names and whose primary business is not debt collection.”  Henson v. Santander Consumer USA, Inc., No. RDB-12-3519, 2014 WL 1806915, at *3 (D. Md. May 6, 2014).  Because Santander had purchased Petitioners’ loans and was collecting them in its own name and on its own account, the district judge concluded that Santander was not a “debt collector.”  On appeal, the U.S. Court of Appeals for the Fourth Circuit affirmed, adopting the district court’s reasoning and joining the Ninth and Eleventh Circuits in concluding that the FDCPA does not apply to debt buyers.  Schlegel v. Wells Fargo Bank, NA, 720 F.3d 1204 (9th Cir. 2013); Davidson v. Capital One Bank (USA), N.A., 797 F.3d 1309 (11th Cir. 2015).  Three other circuit courts, the Third, Sixth, and Seventh, have held to the contrary, finding that the term “debt collector” includes debt buyers where the debts they purchase are in default at the time of acquisition.  See Fed. Trade Comm’n v. Check Investors, Inc., 502 F.3d 159 (3d Cir. 2007); Bridge v. Ocwen Federal Bank, FSB, 681 F.3d 355 (6th Cir. 2012); Ruth v. Triumph P’ships, 577 F.3d 790 (7th Cir. 2009).

The outcome of Henson appears to hinge almost entirely on the reading of one particular phrase in the statute.  In pertinent part, the FDCPA defines “debt collector” to include “any person who regularly collects . . . debts owed or due . . . another.”  The Petitioners argue that, although their debts were purchased by Santander and are therefore due to Santander, the debts are “owed” to the entity who originated them, CitiFinancial Auto.  Accordingly, they assert that Santander is a debt collector as it regularly collects debts owed to another.  

Though the bench was relatively quiet during the arguments, the justices who did speak suggested they had difficulty accepting the Petitioners’ reading.  Justice Samuel Alito commented that Petitioners’ reading is “not the first way you’d read that. It’s not the fiftieth way you would read that.”  And Justice Elena Kagan asked the Petitioners’ lawyer, “Can you come up with any sentence [that] points to your reading rather than towards” his opponent’s.  At the same time, Justice Kagan noted that, under Respondent’s reading of the statute, an entity that serviced a loan (as Santander had done with respect to Petitioners’ loans) and was a “debt collector” subject to the FDCPA would no longer be subject to the FDCPA upon purchasing the loan it previously serviced.  She questioned the reasoning behind Congress’s drawing such a line.  Chief Justice Roberts offered something of an explanation toward the conclusion of the arguments when he noted that the issue was not necessarily before Congress back in 1977.  Rather, the question is a new one that has resulted from the evolution of the secondary market.

State legislatures, too, have found it necessary to revisit their own debt collection laws, a number of which mirror the federal FDCPA, and consider whether changes are needed to address changes within the industry.  A bill currently pending before the Committee on Insurance and Financial Services of the Maine Legislature, L.D. 1199, titled “An Act to Promote Fiscal Responsibility in the Purchasing of Debt,” would specifically regulate the secondary market in significant ways.  Among other things, the act would (i) require creditors to provide debt buyers eleven months of statements and an account level, rather than portfolio level, bill of sale upon purchasing loans, (ii) require debt buyers to produce a live witness at trial rather than relying on a sworn affidavit as originating creditors are permitted to do, and (iii) deny debt buyers a most critical judgment enforcement remedy, wage garnishment.  Not only would these provisions adversely affect the business of debt buyers, they would subject originating creditors to potential liability under the Maine FDCPA each time they seek to sell off debt.  A public hearing on L.D. 1199 was held on April 11, 2017, and a subsequent work session was held on April 18, 2017, at which the bill was tabled.  Pierce Atwood lawyers are currently representing a financial industry client before the Legislature on the bill.

Given the recent and continuing growth of the secondary market for consumer debt, these and other significant legal developments affecting that market bear careful watching. 

The lawyers at Pierce Atwood regularly advise financial institutions and other clients on these and other creditors’ rights issues. With offices in Maine, Massachusetts, New Hampshire, Rhode Island, and Washington D.C., we represent clients regionally and nationally on a wide variety of creditors’ rights matters, including lawsuits filed in both federal and state courts.  For more information on what Pierce Atwood can do for you in this area, please contact John Aromando, Jack Manheimer, Eric Wycoff, or Ryan Kelley,  or click here to visit our Banking & Financial Services practice.


[1] Also pending before the Court is Midland Funding LLC v. Johnson, #16-348 (Sup. Ct.), which presents the questions of whether the filing of a proof of claim for an extinguished time-barred debt in a bankruptcy case violates the FDCPA and whether the Bankruptcy Code, which governs the filing of proofs of claim, precludes application of the FDCPA under such circumstances.