A Company That Purchases Debt in Default and Then Collects That Debt Is Not Necessarily a Debt Collector Under The FDCPA

The U.S. Court of Appeals for the Fourth Circuit recently held that a company which attempts to collect defaulted debt that it buys, i.e. for which the company is now the creditor, does not necessarily qualify as a debt collector for purposes of the Federal Debt Collection Practices Act (FDCPA).

In Henson v. Santander Consumer USA, Inc., a number of consumers purchased cars using automobile financing from CitiFinancial Auto Credit, Inc. and various of its affiliates (collectively, CitiFinancial).  After the consumers defaulted on their payments, CitiFinancial repossessed and sold the cars, however the consumers still owed deficiency balances.  CitiFinancial eventually sold these outstanding debts for pennies on the dollar to Santander Consumer USA, Inc. (Santander), a consumer financing company.  Santander attempted to collect the debts and the consumers sued, claiming Santander’s debt collection practices violated the FDCPA.  The district court dismissed the case on the basis that Santander did not qualify as a debt collector under the FDCPA.

The Fourth Circuit explained that three types of entities are considered debt collectors under the FDCPA: 1) a business whose principal purpose is to collect debts; 2) a business which regularly collects debts owed to another, and 3) a business that collects its own debts, but does so using a different name such that a consumer would think a third-party is collecting the debt.

Santander did not meet the first definition since the plaintiffs pled that Santander was a consumer finance company and did not plead that Santander’s principal purpose was to collect debts.  The fact that Santander was a diversified company seems to have been the key factor.  Santander’s business included lending money, servicing loans, collecting debt for itself, collecting debt for others, and otherwise borrowing and investing its capital.  That Santander sometimes engaged in debt collection did not mean that debt collection was its principal business.

The plaintiffs argued that Santander fell under the second definition since Santander was attempting to collect debts which were originally owed to another and which had defaulted.  The Court held that to fall under the second definition, the purported debt collector must be collecting the money on behalf of another, and since Santander was the creditor for the debt at issue, it was not collecting on behalf of another.  The fact that the debt was defaulted or had been originally owned by another did not change this analysis.  The Court noted that while the FDCPA did not apply to companies which are collecting non-defaulted debt (such as a mortgage servicer receiving and processing a consumer’s regular payments), that did not inversely mean that anyone collecting defaulted debts was a debt collector.  Likewise, while Santander sometimes collected debt on behalf of others as part of its business—where it would be subject to the FDCPA under the second definition of a debt collector—did not mean that Santander was a debt collector for purposes of the FDCPA when collecting debt for which it was also the creditor.

Finally, the Court found that Santander was not conducting the collection under another name, such that it did not meet the third definition of a debt collector.

Since the Court found that Santander did not meet any of the three definition of a debt collector under the FDCPA, the Fourth Circuit affirmed the district court’s dismissal.

The WBK Firm regularly advises and represents companies throughout the United States in connection with the Fair Debt Collection Practices Act.