Should a full-service consumer finance company be subject to federal debt collection law when it attempts to collect upon debt it purchased? Attorneys general from Maryland, the District of Columbia, California, New York, and more than two dozen other states have urged the Supreme Court to adopt a startling new interpretation of federal law and widen the scope of the Fair Debt Collection Practices Act (FDCPA) in a recent amicus brief. While the attorneys general argued that their interpretation of the law is a natural fit for Congress’ vision in drafting the FDCPA, there are significant reasons for the consumer financial services industry—particularly auto lenders—to be concerned about this novel proposed expansion.
Under the FDCPA, parties attempting to collect a debt may be classified either as a “debt collector” or as a “creditor.” This analysis has historically turned on whether the collecting party’s principal purpose is to collect debts, whether it regularly collects debts owed to someone else, or whether it collects its own debts using a different name. The language of the FDCPA also states that a party collecting debt “for another” is not a creditor.
The stakes of this analysis are often significant, as only debt collectors (and not creditors) are subject to the FDCPA’s reach and the hefty class-action lawsuits that are often brought under this statute. While the FDCPA regulates parties collecting debts for others (i.e. mortgage servicers), it does not usually regulate creditors collecting their own debts or those that they purchased. This distinction is critical, as damages for violations of the FDCPA’s technical provisions often reach $1,000 per claim plus attorneys’ fees and actual damages. When conduct is spread over a large portfolio of loans, class-action claims often implicate a large amount of money in controversy.
If the FDCPA is expanded to include the novel reading proposed by these attorneys general, much of the consumer financial services industry could be impacted. Auto lenders, in particular, would be subject to technical FDCPA claims if collecting upon defaulted loans purchased from another entity. Yet, where would this interpretation stop? It is conceivable that consumer advocates would seek to argue that indirect auto lenders would also be subject to the FDCPA after receiving an installment contract assignment from an originating dealership. Similar arguments would be also conceivable in the credit card and student loan industries.
This slippery slope is just one of many reasons why this scope change is likely inappropriate. Many states’ debt collection statutes already apply to creditors and provide redress to consumers if unscrupulous debt collection practices occur. The CFPB recently outlined a proposed debt collection rulemaking for debt collectors, while also noting that it is drafting a proposed rulemaking to cover the actions of creditors collecting debts on their own behalf. Of course, the CFPB has also aggressively pursued enforcement actions against creditors based upon unfair, deceptive and abusive practices relating to debt collection—all entirely outside the traditional scope of the FDCPA. Given these current regulatory and enforcement measures, there seems to be no need to extend the FDCPA beyond its historical footprint. Just how this will all play out remains to be seen when the Supreme Court reviews this proposed expansion in upcoming cases.