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2019-03-08 Bending The FDCPA To The Breaking Point 3rdcir Broadens Scope in Ruling Creditor Is A Debt Collector
2019-03-08 Bending The FDCPA To The Breaking Point 3rdcir Broadens Scope in Ruling Creditor Is A Debt Collector
Broadens
Scope in Ruling Creditor is a Debt Collector
consumerfsblog.com/2019/03/bending-the-fdcpa-to-the-breaking-point-3rd-cir-broadens-scope-in-ruling-creditor-is-
a-debt-collector/
Donald Maurice
Sound confusing? It is, but the story on how the Court arrived there is worth the read.
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The FDCPA defines “debt collector” in two ways. The first is an entity whose principal
purpose is the collection of debts. The second is an entity that “regularly” collects debts,
“directly or indirectly” that are alleged “to be owed or due or another.”
In Barbato v. Greystone Alliance, LLC the question was whether Greystone Alliance, LLC
fit the “principal purpose” definition. The issue was critical to Greystone because if it
obtained a finding that it was not a debt collector, it would not face FDCPA liability.
Greystone argued its principal business is to purchase charged off receivables, but it did
not see itself as a debt collector because it did not collect the debt it purchased. Instead
it engaged third-party collection agencies and a law firm for that purpose. Greystone also
relied on earlier decisions holding that the FDCPA defined a creditor and debt collector
as mutually exclusive, so it could not be both.
The Third Circuit’s resolution of the issue did not end well for Greystone. The Court noted
that its recent decision in Tepper v. Amos held that creditors can also be debt collectors
for FDCPA purposes. But Tepper was a slightly different case.
Although the entity in Tepper also purchased charged off debt, it also collected that debt
in-house. Greystone did not engage in in-house collection and so it set up a plausible
argument that it was a creditor unlike the Tepper entity. After all, the definition of the
FDCPA includes all types of creditors – those who “offer[] or extend[] credit creating a
debt” are creditors. But you don’t have to be a lender either, because the FDCPA includes
within the creditor definition persons “to whom a debt is owed. . .” Greystone is such a
creditor.
Greystone was ultimately found to be a debt collector. But since Greystone is also
creditor it was necessary for the Third Circuit to dispense with a prior ruling from its 2007
decision in FTC v. Check Investors, Inc. which supported Greystone’s position. There, the
Third Circuit concluded that “. . .as to a specific debt, one cannot be both a ‘creditor’ and
a ‘debt collector,’ as defined in the FDCPA, because those terms are mutually exclusive.”
To determine a person’s status under the FDCPA, in FTC v. Check Investors, Inc., the Third
Circuit introduced the “default” test that would exclude an entity from “debt collector”
status if the debt it acquired was not in default at the time it was acquired. For 12 years,
the default test served a clean way for courts to reconcile the debt collector/creditor
distinction.
Both the Tepper and Barbato decisions concluded that the Supreme Court’s 2017
decision in Henson v. Santander Consumer USA Inc . abrogated the “default” status test and,
as a result, so too the understanding that the definitions of creditor and debt collector
were “mutually exclusive.”
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But the death of the default status test does not support undoing the principle that one
could not be both a creditor and debt collector with respect to the same debt, it only
supports it. The test was created for the sole purpose of transforming a debt buyer
creditor into a debt collector.
As the Third Circuit conceded in FTC v. Check Investors, Inc., the default test “overlooks the
fact that the person engaging in the collection activity may actually be owed the debt and
is, therefore, at least nominally a creditor.” It was necessary to create the test because
the Court believed “Congress has unambiguously directed our focus to the time the debt
was acquired in determining whether one is acting as a creditor or debt collector under
the FDCPA.”
With the default test gone, the status of Greystone as a creditor would seem to be
advanced. It was not the case.
Tepper and Barbato flavor their decisions with references to development of the debt
buying industry since the 1978 enactment of the FDCPA. This development, according to
the Third Circuit in Tepper, necessitated that “courts have had to find new ways to
distinguish ‘debt collectors’ from ‘creditors’ to determine whether the FDCPA applies to a
particular entity.” Read another way, it was necessary to create a new way to keep debt
buying subject to the FDCPA even though a debt buyer is “nominally a creditor.”
If Henson ended the default status test, can we still overlook that the fact that a debt
purchaser is a creditor? The Barbato decision says you can and pointed to its 2000
decision in Pollice v. National Tax Funding, L.P., where an entity like Greystone purchased
defaulted property taxes and municipal sewer and water bills and then engaged others
to collect the purchased debts.
While that decision too relied on the default status test, Barbato says that was only part
of the reasoning. National Tax Funding was found to be a debt collector because “there
[was] no question that the `principal purpose’ of [the] business is the `collection of any
debts,’ namely, defaulted obligations which it purchases from municipalities.” That is not
much of a distinction since the focus in Pollice’s rationale was still on the purchase of
“defaulted obligations.”
Perhaps recognizing this weakness, Barbato takes another route. Examining the two
categories of the “debt collector” definition, the decision noted that the “principal
purpose” definition focuses on “what” a business is collecting. “As long as a business’s
raison d’être is obtaining payment on the debts that it acquires, it is a debt collector.”
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There is a troubling problem in Barbato that is difficult to reconcile. By doing away with
the default status test, the mere acquisition of debt is now the trigger, even if the debt is
a performing loan.
Here lies the conflict. Persons who are collecting debt not in default at the time it was
obtained by the collector are excluded from the definition of debt collector under 15
U.S.C. § 1692a(6)(F)(iii), provided they are collecting a debt “owed or due another . . .” But,
when one is collecting a debt for itself, after Barbato and Tepper, the default status test is
now gone and an entity whose principal purpose is “obtaining payment on the debts that
it acquires” is now a debt collector, even when the debt is “not in default.”
Some can now argue that an entity whose principal purpose is to acquire performing
loans with the sole purpose of collecting on those loans is a debt collector under the
FDCPA. Suppose that same entity retains a third party to collect the performing debt.
Under 15 U.S.C. § 1692a(6)(F)(iii), the third party is not a collector, even if their principal
business is debt collection or they regularly engage in debt collection for another.
The internal conflict is created solely because entities like Greystone were intended to be
treated as creditors. A creditor collecting its own debt does not need an exemption like
that found in § 1692a(6)(F)(iii) because Congress did not contemplate courts would ever
read the FDCPA as the Third Circuit did.
Perhaps the Third Circuit did not need to go as far as to kill off the default status test and
could reason that the structure of the statute implies that the acquisition of defaulted
debt as a principal purpose qualifies as the “collection of any debts.” But it is hard to
imagine the Court going back now after twice concluding that Henson “rejected the
‘default’ test.”
The debt buying industry has faced FDCPA risk for some time and has created its own
standards through its trade organization RMAI, which not only requires FDCPA
compliance, but self-imposes standards exceeding it. There is little if any impact on that
sector.
The cost of Barbato and Tepper’s expansion will be paid by indirect lenders, special
purpose entities created solely to hold performing debt and the like. The decisions’ “new
way” of keeping debt buyers within the FDCPA do so by eviscerating the distinction
between a creditor and debt collector and the cost for taking that route will be paid by
disruption of the far larger consumer financial services industry.
In the eyes of the Third Circuit, if an entity’s “ raison d’être is obtaining payment on the
debts that it acquires, it is a debt collector,” even if the debt is a performing loan. While
the suspect reasoning of Barbato and Tepper may limit their adoption outside the Third
Circuit, their application to creditors will be tested often in the coming years.
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