Legal Resources

U.S. Supreme Court Clarifies Scope of Fair Debt Collections Practices Act for Financial Institutions

On June 12, 2017, the U.S. Supreme Court held yesterday that financial institutions do not become subject to the Fair Debt Collection Practices Act (“FDCPA”) because of their purchase and collection of defaulted loans. The Court’s opinion in Henson v. Santander Consumer USA, No. 16-349, 582 U.S. ____ (June 12, 2017) resolves a circuit split, confirming that financial institutions can continue to purchase and collect defaulted loans without incurring FDCPA liability.

The FDCPA restricts the collection practices of “debt collectors.” Remedies for violations can include damages along with attorneys’ fees and costs for prevailing plaintiffs. In Henson, the Supreme Court tackled the FDCPA’s notoriously imprecise definition of “debt collector” to clarify when an entity becomes subject to FDCPA restrictions.

In Henson, Santander Consumer USA initially acted as servicer for certain loans originated by CitiFinancial. Santander later purchased from CitiFinancial, for its own account, a $3.5 billion package of loan receivables. In a subsequent class action lawsuit, certain borrowers on the loans accused Santander of violating the FDCPA in the course of collecting on the loans it had purchased. The question was whether Santander had acted as a “debt collector” when it sought to collect loans that it had purchased from a third-party originator.

Both the trial court and the Fourth Circuit Court of Appeals held where Santander collected loans for its own account, it fell outside the FDCPA definition of “debt collector.” In a unanimous June 12, 2017 opinion, the Supreme Court agreed, holding that under the plain language of the statute, an entity does not act as a “debt collector” when it enforces its own collection rights.

As a result, when Santander was collecting debts for CitiFinancial, its actions were subject to the FDCPA. But after Santander purchased the debts and collected them for its own benefit, Santander was acting as a “creditor” under the FDCPA, and was not subject to the restrictions placed upon a “debt collector.”

It remains important for financial intuitions to understand the full scope of the FDCPA. The Henson opinion did not address alternative bases under which an entity could qualify as a debt collector under the FDCPA, including when an entity’s “principal purpose” is the collection of debts. Nonetheless, the Supreme Court’s opinion provides important confirmation for financial institutions that the act of collecting on their own loans does not render them subject to FDCPA liability.