Debt buyers may get exemption from collection rules
Supreme Court considers case that could affect consumers in debt
By Fred O. Williams | Published: April 18, 2017
Expert on consumer credit laws and regulations
Should rules against hardball debt collection give a pass to companies that collect debt they buy from others?
The Supreme Court heard arguments Tuesday on whether debt buyers should be exempt from the Fair Debt Collection Practices Act (FDCPA). The consumer protection law forbids debt collectors from using threats, lies or harassment, or revealing your debt to other people.
The law exempts creditors who collect their own debts from the rules. But the 1977 law was written before debt buying became a big industry. Now, courts around the country are divided over whether a company that buys unpaid debts is a creditor under the law, and thus exempt from the rules that apply to debt collection agencies.
“The industry has evolved in ways that raise questions,” Chief Justice John Roberts said during the hearing.
The court’s decision in the case – Ricky Henson v. Santander Consumer USA – may have far-reaching consequences for consumers, especially the nearly 13 percent of U.S. consumers who have at least one debt in the collection process.
Some justices were skeptical that the definition of a debt collector covered by the law could be stretched to companies that own the debt they’re collecting.
“You’re really going uphill on that,” Justice Samuel Alito told Kevin Russell, the attorney for debtor Ricky Henson, about a contorted argument concerning the definition.
Some discussion centered on the meaning of debts being “owed” within the definitions of creditors and collectors. “When I think about the word,” Justice Elena Kagan said to Russell, “I can't get it to mean what you want it to mean.”
Collection industry lawyers say making debt buyers exempt will protect them from being wrongly targeted in class-action lawsuits that are based on actions of collection agencies they hire. Collection agencies that work on behalf of debt buyers would still be covered by the debtor protection law.
But consumer advocates fear that a broad exemption for debt buyers would create a loophole in consumer protection, encouraging billions of dollars in consumer debts to be collected in a rule-free environment.
“If the FDCPA does not prohibit deceptive practices by debt purchasers, those practices will flourish,” says a friend-of-the-court brief filed by Public Counsel, a pro bono consumer law firm in Los Angeles, and the UCLA School of Law Supreme Court Clinic. A broad exemption would encourage debt collectors to restructure and combine with debt buyers to escape the law’s oversight, the consumer groups predict.
Russell said it would be easier than that for collectors to exploit the loophole. “All they would have to do is change the contract with the customer,” he said, naming them as the owner of the debt rather than the hired collector.
Business advocates see the reverse happening if the court rules against the exemption for debt buyers. Lenders such as banks and finance companies, which Congress intended to exempt from the law, could now fall within its provisions. If a lender happened to buy a portfolio with some defaulted debt, and then tried to collect, it would be covered by the FDCPA, according to a friend-of-the-court brief from the U.S. Chamber of Commerce, American Financial Services Association and the Financial Services Roundtable.
“This expansion of the FDCPA’s coverage would have dramatic negative consequences,” the business groups say in their filing. Lenders often buy and sell portfolios of loans to manage risk. “Without a cost-prohibitive loan-by-loan review, there is no realistic way to screen out defaulted loans even if a purchaser wanted to.”
Blurry definitions in the debt buying business
The case heard Tuesday got its start when Maryland resident Ricky Henson took out a car loan from Citibank’s auto lending unit. In 2011, after his loan went unpaid and the car was repossessed, Citi sold the still-unpaid portion of his debt to Santander. Henson, with others in the same situation, sued Santander in 2012 under the fair debt collection law, saying the company tried to inflate the amount due.
A federal appeals court in Richmond, Va. ruled that Santander became a creditor when it bought the debt, making it exempt from collection law. In order to meet the exemption, a creditor can’t be a company whose “principal purpose” is to collect unpaid debts. Santander has a lending and loan-servicing business in addition to debt buying.
Henson’s case shows how the definitions in the debt-buying business can be blurry. Santander was servicing Henson’s debt on behalf of Citi. It bought the debt along with many others in a $3.6 billion portfolio of loans, only some of which were in default, according to court papers.
Kannon Shanmugam, attorney for Santander, told the court it should not assume Congress would have considered Santander as a debt collector it if was writing the law today. By buying Citi’s auto lending portfolio, “we really stepped into Citi's shoes,” he said. “It was as if we were the original creditor.”
Exemption’s supporters and opponents
Twenty-eight states and the District of Columbia filed a friend-of-the-court brief against the exemption for debt buyers. Abusive debt collection hurts states by driving households into bankruptcy and clogging the court system with hardball collection lawsuits, they said.
“Debt buyers who purchase defaulted consumer debt – usually for pennies on the dollar – and then attempt to collect that defaulted debt are, from a consumer’s perspective, no different from debt collectors who do not own the debt,” the states’ filing said.
Opponents of expanding the exemption say it goes against Congress’s intention. Original creditors, the companies that make loans, got the exemption because it was thought they avoid hardball collection tactics to keep a good reputation among consumers. The law targets collection agencies that lack a consumer-oriented business of their own, insulating them from consumer opinion.
Debt buyers’ history of burdening consumers
Debt buyers, however, have been the source of problems for debt-burdened consumers in the past. In 2015, the Consumer Financial Protection Bureau ordered the two largest buyers, Encore Capital Group and Portfolio Recovery Associates, to pay $79 million in refunds and penalties – and stop collecting on $127 million in debts. The companies demanded payment and even filed lawsuits on debts that they knew were expired or otherwise flawed, the CFPB charged. A 2013 report on debt buying by the Federal Trade Commission found that debt buyers frequently lacked account information to verify the debt was genuine, or the amount was correct.
Debt collection is the top generator of complaints filed with the CFPB, the agency said in a 2016 report. There were 88,000 complaints about collectors last year, accounting for 30 percent of all complaints filed with the agency. The agency is working on regulations that would update and strengthen the debtor protection law. The CFPB can crack down on debt buyers using its federal enforcement authority, but consumers acting for themselves must rely on the FDCPA.
See related: Know your rights: Fair Debt Collection Practices Act
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