Is a Buyer of Defaulted Debt a “Debt Collector” for Purposes of the FDCPA?

Written by: Lisa Connolly

“Disruptive dinnertime calls, downright deceit and more…” On June 12, 2017, the U.S. Supreme Court issued a unanimous opinion in Henson vs. Santander Consumer USA, Inc., 582 U.S. _____ (2017), holding that a company who purchases debt and seeks to collect such debt for itself and not on behalf of a third-party creditor is not a “debt collector” subject to scrutiny under the Fair Debt Collection Practices Act (“FDCPA”).

The Key Issue.  The key issue in this case revolves around the FDCPA’s definition of the term “debt collector” and whether Santander Consumer USA, Inc. (“Santander”) satisfies the definition of “any person who regularly collects … debts owed or due…another”.  15 USC 1692(a)(6).  The FDCPA was enacted in order to address and protect consumers from abusive debt collection practices by debt collectors.  15 USC 1692(e).  In general, the FDCPA applies to consumer transactions in which a consumer is obligated to pay money arising out of a transaction for personal, family, or household purposes.  15 USC 1692(a)(5).

Whether a person or company falls under the scrutiny of the FDCPA depends on whether such person or company is a “debt collector”. Subject to certain exclusions, a person or company is a “debt collector” for purposes of the FDCPA if (i) the principal purpose of such person or company’s business is the collection of debts or the enforcement of security interests, (ii) such person or company regularly collects or attempts to collect debts owed to a third party, or (iii) in the collection of its own debts, such person or company uses a different name indicating that a third person is collecting or attempting to collect such debts.  15 USC 1692(a)(6).  Creditors who originate debt are typically excluded as a “debt collector” so long as they are collecting their own debts in their own name.  15 USC 1692(a)(6)(F).

Background.  As background, four consumer petitioners received secured automobile loans from a consumer finance company, Citi Financial Auto (“Citi”), and thereafter defaulted on the loans due to non-payment; this resulted in the foreclosure and repossession of petitioner’s vehicles and pursuit of deficiency balances owed to Citi.  Santander, a consumer finance company in the business of buying defaulted consumer debt, briefly serviced Citi’s defaulted loans during the time Citi held the loans, including petitioner’s loans.  Subsequently, Santander purchased a portfolio of defaulted automobile loans from Citi, including those of petitioner, and attempted to collect the debt it acquired on its own account.  Petitioners brought class action claims against Santander alleging that Santander violated the FDCPA.  The District Court and the Fourth Circuit rejected petitioner’s argument that the FDCPA applied to Santander, finding that Santander was not a “debt collector” under the FDCPA due to the fact that Santander did not regularly collect debts “owed…another”.

Analysis.  In bringing its claims, petitioners argued that Santander was necessarily a debt collector subject to the FDCPA because prior to Santander’s purchase of Citi’s defaulted loans, it serviced Citi’s defaulted loans; once Santander became the holder of such loans, Santander effectively sought to recover on a debt for a third party. Petitioners also pointed to the word “owed” under the FDCPA to suggest that the timing and type of the debt exposed debt purchasers to scrutiny for seeking to collect debts previously owed to third parties, but excluded from any scrutiny loan originators who maintain ongoing relationships with debtors and who never collect debt for third parties.

In addition to arguing semantics that would broadly define a “debt collector” to include a debt purchaser, petitioners also pitched a public policy argument pushing the idea that a broad interpretation of the statute would best uphold consumer protections and the intent of Congress in its enactment of the FDCPA. The Court rejected petitioner’s claims, agreeing with Santander: Santander became a creditor collecting its own loans once it purchased and began collecting upon such loans, and was thus excluded from FDCPA.

Narrow Ruling.  In the Court’s narrow ruling, the Court declined to consider two issues not previously raised by petitioners: (i) whether debt buyer that regularly collects debts on its own account and services third-party debt is a “debt collector” under the FDCPA, and (ii) whether there is a threshold of debt that a debt purchaser must own to be exempt under the “principal purpose” definition of a “debt collector” – those engaged “in any business the principal purpose of which is the collection of debts.” §1692a(6). These issues are likely to be further litigated, and may open the door for potential liability to debt buyers in the future.

Ultimately, the court’s ruling resolves a circuit split in favor of banks and finance companies that seek to collect upon the debt that they purchase.

Concluding Thoughts.  Heralded as a judge with judicial philosophy and style nearly identical to that of Justice Scalia, Justice Gorsuch’s appointment to the Supreme Court left many of us anticipating what mark he would make on a bench often dominated by the originalist views of Justice Antonin Scalia. In his first opinion, Justice Gorsuch proves he is a witty textualist who is not afraid to break the rules of grammar for dramatic effect, challenge canons of construction, and delve into linguistic analysis, all while remaining sensitive to policy concerns and, in the end, recognizing that in the context of the plain language of the statute such concerns “present many colorable arguments…a fact that suggests…these are matters for Congress, not this Court to resolve.”

June 19, 2017 at 9:12 am

Written by: Lindsay Harden

Yesterday the OCC issued Frequently Asked Questions (“FAQs”) to supplement OCC Bulletin 2013-29, “Third-Party Relationships: Risk Management Guidance.” The FAQs provide helpful guidance to banks on subjects including working with fintech companies, reducing oversight costs for lower-risk third-party relationships, and engaging in marketplace lending arrangements with non-bank entities. Portions of this guidance may be particularly useful for community banks who wish to leverage resources by distributing costs among multiple banks. For example, the OCC clarified in the FAQs that banks using a common third-party service provider may collaborate with each other to meet certain OCC expectations with respect to performing due diligence, contract negotiation, and ongoing monitoring responsibilities. The FAQs also make clear that a bank may outsource certain compliance management functions or collaborate with a group of banks to manage cybersecurity issues, as additional cost saving alternatives.

June 8, 2017 at 2:11 pm

Federal Banking Agencies Remind Banks of Appraisal Waiver Process

Written by: Jennifer Salisbury

On Wednesday, federal banking agencies issued a reminder of two approaches financial institutions can use to ease the shortage of qualified appraisers that is slowing down closing times. First, temporary practice permits allow state-certified or licensed appraisers to provide services in other states.  Second, a financial institution may qualify for a temporary waiver of the requirement to use a state-certified or licensed appraiser if the institution faces documented scarcity of appraisers that has led to “significant delays” in appraisers on federally related transactions in a specific geographic area.  For more information, click here to view the ABA Banking Journal article discussing this topic.

June 2, 2017 at 3:33 pm

Bank/Tech Contract Concerns Issued By FDIC IG

Written by: Lindsay Harden

The FDIC’s independent Office of Inspector General (OIG) issued a report late last week detailing a study it conducted of contracts between financial institutions and technology service providers (TSPs). The report concluded that such contracts are commonly not sufficient to address certain risks that are inherent in these relationships. Specifically, contracts with TSPs frequently lack specificity and completeness with respect to business continuity and incident response procedures and obligations.

For several years the financial regulatory agencies have shown an interest in third-party risk management, including ensuring adequate protection of private customer information. Recently, the FDIC and FFIEC have engaged in further initiatives related to cybersecurity and outsourcing of technology services. However, according to the FDIC’s Division of Risk Management Supervision, contracts with TSPs are generally out of date and do not reflect recent efforts to strengthen cybersecurity.

Based on a review of 48 contracts between financial institutions and TSPs, the OIG report made the following findings:

  • Financial institution analyses do not fully consider business continuity and incident response risks presented by TSPs
  • Key contract provisions provide limited coverage of the TSP’s business continuity planning and incident response and reporting responsibilities
  • Key contract terms lack clear and specific definition
  • The FDIC has implemented numerous initiatives to address cybersecurity risks
  • Financial institution third-party relationship risks remain and will require continued supervisory attention

In addition, the report provided some examples of necessary types of provisions that are frequently missing from contracts. For instance, only half of the contracts reviewed explicitly included business continuity provisions, and only a handful established clear performance standards and remedies for failure to meet those standards. Furthermore, many key terms used in regulatory and supervisory guidance—including “misuse of information,” “unauthorized access,” “significant disruption,” and “cyber event”—were often unused, undefined, or inadequately defined in TSP contracts.

The FDIC has plans to take certain actions by October of 2018 to follow up on the OIG’s recommendations in the report. One such action is continuing to communicate to financial institutions the importance of effective contracts with TSPs through the FDIC’s risk management supervision program, which includes guidance, examination procedures, examinations, and off-site monitoring.

The OIG report and potential FDIC action provide banks with additional leverage in negotiating TSP contracts. Affected banks should closely review existing contracts, and if your contracts are close to renewal, or if you are considering adding services under those contracts, you have an opportunity to address deficiencies.  You should review the terms of the agreement and work with counsel to identify gaps in existing or proposed agreements. Please contact us if you need assistance, as we have significant experience negotiating and drafting contracts with TSPs and assisting banks with TSP vendor diligence.

For more information, please contact Karen Garrett or Steve Cosentino, leaders of our fintech practice.

February 23, 2017 at 10:00 am

CFPB Issues Consent Order for RESPA Violations

Written by:  Robert Harry

On January 31, 2017, the Consumer Financial Protection Bureau (“CFPB”) published a Consent Order with Prospect Mortgage, LLC (“Prospect”) for alleged violations of the Real Estate Settlement Procedures Act (“RESPA”) prohibitions against kickbacks and unearned fees, commonly referred to as “RESPA Section 8”. RESPA Section 8 states that “no person shall give and no person shall accept any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person”. RESPA Section 8 applies to, among others, mortgage lenders, title companies, lawyers, servicers, and real estate agents.

The CFPB alleges that Prospect entered into a series of agreements with two real estate brokerage agencies and a loan servicer for mortgage origination referrals. The CFPB noted that Prospect violated RESPA Section 8 by:

1. Using lead agreements to pay brokers for referrals;
2. Using Marketing Services Agreements, commonly referred to as “MSAs” to pay brokers for referrals;
3. Using desk licensing agreements to pay brokers for referrals;
4. Encouraging brokers and agents to require consumers to loan obtain pre-approvals with Prospect’s loan officers
5. Paying the servicer for referrals;
6. Using a third-party’s website advertising to pay real estate brokers for referrals; and
7. Encouraging brokers to use fees and credits to pressure consumers into using Prospect.

The CFPB ordered Prospect to pay a $3.5 million dollar civil money penalty to the bureau. Further, Prospect may still have liability for any private civil action available under RESPA Section 8 to any consumer harmed by these actions, is prohibited from engaging in the activities described in the Consent Order, and must undergo compliance training, and conduct extensive reporting and recordkeeping.

Additionally, and in a departure from the CFPB’s prior RESPA Section 8 enforcement actions, the CFPB also entered into Consent Orders with the two real estate brokerages for accepting the payments in violation of the law. This is the first time the CFPB has enforced RESPA Section 8’s prohibition against kickbacks against real estate brokers under the common use of MSAs, desk licensing, and co-marketing agreements. The two brokerages agreed to pay a combined $230,000.00 in fines and disgorgement due to the alleged violations and may still be held liable under related consumer private causes of action.

The actions by the CFPB reinforce Richard Cordray’s position that the bureau will analyze marketing arrangements between settlement service providers with great scrutiny. The orders rely on internal communications and statements to demonstrate that the facially lawful arrangements under RESPA Section 8 were likely only a means of circumventing the anti-kickback provisions while still paying for referrals. It’s imperative that all settlement service providers carefully evaluate any marketing or business activities with other settlement service providers to ensure compliance with RESPA.

The attorneys at Stinson Leonard Street are uniquely able to counsel and assist clients in the residential real estate finance and sales industry to navigate the complex regulation that is RESPA Section 8.

February 16, 2017 at 10:35 am

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