Fourth Circuit Holds that Defaulted Status of Debt Has No Bearing on Whether a Person Qualifies as a “Debt Collector” Under the FDCPA

By:      Joshua A. Huber

On March 23, 2016, the Fourth Circuit Court of Appeals issued its opinion in Henson v. Santander Consumer USA, Inc., holding that the default status of a debt has no bearing on whether an entity qualifies as a “debt collector” under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 (“FDCPA”).[i] The Fourth Circuit’s reading of the plain language of the FDCPA’s “debt collector” and “creditor” definitions, found in 15 U.S.C. § 1692(a)(6) and (a)(4), respectively, rejects the argument routinely advanced by borrowers, and commonly by courts throughout the country, that an entity who acquires a debt that is already in default is automatically a “debt collector.”

Henson involved a portfolio of defaulted auto loans purchased by Santander from CitiMortgage.[ii] When Santander sought to collect on the defaulted loans, the Henson plaintiffs filed suit under the FDCPA—which applies only to “debt collectors,” and not “creditors”—and maintained that the default status of debt determined whether a purchaser of debt, such as Santander, was a “debt collector” or a “creditor.”[iii]

The Henson plaintiffs’ argued, in part, because the FDCPA excludes from the definition of “creditor” any person that “receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another,” such person must be a “debt collector.[iv]    The Court rejected this argument and observed that the exclusion on which the Henson plaintiffs relied did not depend only on the default status of the debt. Rather, “the exclusion applies only to a person who receives defaulted debt ‘solely for the purpose of facilitating collection . . . for another.’ ”[v]

The Court further stated that even if an entity falls within the enumerated statutory exclusion from the definition of “creditor,” an FDCPA plaintiff must still demonstrate that the defendant meets the substantive definition of a “debt collector” as set forth in the FDCPA’s main text.[vi]  The Court summarized that definition to include: “(1) a person whose principal purpose is to collect debts; (2) a person who regularly collects debts owed to another; or (3) a person who collects its own debts, using a name other than its own as if it were a debt collector.”[vii]

Thus, the material distinction between a “debt collector” and a “creditor,” the Court noted, is whether a person’s regular collection activity is only for itself (a creditor) or for others (a debt collector), with the primary exception being an entity whose principal purpose is the collection of debts—not, as the Henson plaintiffs urged, whether the debt was in default when the person acquired it.

This is a significant development in FDCPA jurisprudence and, by moving the focus away from the status of the debt at the time of assignment, will provide lenders who seek to collect their own debts with a strong defense to future FDCPA liability.

[i] Henson v. Santander Consumer USA, Inc., —F.3d—, 2016 WL 1128419, at *3 (4th Cir. Mar. 23, 2016).

[ii] Id. at *1.

[iii] Id. at *1-2.

[iv] Id. at *2 (citing 15 U.S.C. § 1692a(4)) (emphasis in original).

[v] Id. at *3 (emphasis in original).

[vi] Id. at *4.

[vii] Id. at *3 (emphases in original).

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