Fair Debt Collection: 4.7.2.2 Debt Buyer’s Principal Purpose
In Henson v. Santander Consumer USA Inc.,361 the Supreme Court held that a debt buyer is not one that collects debts “owed or due another,” because it owns the debts after purchasing them.
In Henson v. Santander Consumer USA Inc.,361 the Supreme Court held that a debt buyer is not one that collects debts “owed or due another,” because it owns the debts after purchasing them.
The term “debt collector” means any person who uses any instrumentality of interstate commerce or the mails . . . who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.391
The “regularly collects” prong of the definition of debt collector applies only to those collecting debts owed to another, and not to persons collecting their own debts. In Henson v. Santander Consumer USA Inc.,419 the Supreme Court held that a person collecting debts after purchasing those debts is collecting its own debts and is not collecting debts owed or due another. As a result, the “regularly collects” prong does not apply to debt buyers.420
Congress, in 1986, eliminated the FDCPA’s exemption for attorneys.434 Moreover, the Supreme Court finds attorney conduct in collection litigation to be debt collection.435 As a result, an attorney or law firm is a debt collector if the attorney or firm regularly collects consumer debts owed to another—through communications, settlements, or litigation.436
The Supreme Court in Obduskey acknowledged that even a nonjudicial foreclosure of a mortgage is the collection of a debt.457 The Court explained that, at a minimum, someone who conducts a foreclosure is indirectly attempting to collect a debt.
Persons hired before rent is past due on a residential rental property to manage that property are excluded from the definition of debt collector, even when later collecting rent or pursuing evictions.471 On the other hand, third parties hired to collect overdue rent are clearly debt collectors—regularly collecting debts owed to another.472 The result is no different if someone is hired to both evict tenants and collect past due rent.473 Sending no
The FDCPA defines a debt collector to include “any person” who regularly collects debts owed to another,246 and therefore coverage is not limited to collection agencies.
An officer or employee of a debt collection agency that regularly collects debts meets the definition of “any person” that regularly collects debts owed to another.479 The FDCPA exempts employees or officers of “creditors” and government entities from the definition of debt collector.480 But employees and officers of a collection agency are not covered by these exclusions.
. . . the term [“debt collector”] includes any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts.484
For the purpose of section 1692f(6) of this title, such term [“debt collector”] also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests.505
Few entities meet the standard of having enforcement of security interests as a principal purpose necessary to be covered only under the limited-purpose definition. If a person engages in various forms of debt collection, and not just enforcement on secured debts, the person’s primary purpose may not be enforcement of security interests. It is irrelevant that a person’s principal purpose in dealing with a specific consumer is enforcing a security interest; the principal purpose of a person’s overall activities must be the enforcement of security interests.
While the Obduskey Court left for another day the question of whether those who enforce mortgages through judicial procedures are subject to all FDCPA provisions,521 courts after Obduskey consistently find that they are subject to all FDCPA provisions.522 This means that a multi-state foreclosure law firm may not have a principal purpose of enforcing security interests where it conducts nonjudicial foreclosures in some states, and judicial foreclosures in others.
In 2012, HUD began to implement a stepped-up program to sell off large pools of defaulted FHA-insured loans to private investors. The initiative is primarily known as the Distressed Asset Stabilization Program (DASP).280 HUD had been selling off small pools of defaulted FHA-insured loans as part of a pilot project since 2010. However, the new program involves sales of much larger groups of loans on a more frequent basis.
As described throughout this chapter, the GSEs have developed loss mitigation options that provide borrowers in distress with viable alternatives to foreclosure. For example, in response to the COVID-19 pandemic, the GSEs implemented flexible loss mitigation options with minimal barriers to access.313 Unfortunately, as the GSEs implemented their new loss mitigation options, they simultaneously undercut these efforts through a program that sells off many of the loans they own or guarantee.
Most mortgage servicers do not have foreclosures as a principal purpose. Servicers spend most of their time managing loans that are not in default, collecting timely payments, managing escrow accounts, and providing accounting services to borrowers and investors.535 Servicers regularly file and collect on proofs of claims in bankruptcy cases where many borrowers are not in default on the mortgage loan.
One source to show that a law firm or other entity’s purpose is broader than enforcement of a security interest is the person’s website that may flaunt a broad range of activities.562 Information on a law firm’s broad range of activities (including judicial foreclosures) also can be found on court docket entries, Westlaw or Lexis.563 A servicer’s annual reports and other regulatory filings may give a more accurate picture of the scope of the company’s business than its assertions in litigation.
In its short decision, Obduskey explicitly states no fewer than four times that its holding is that the FDCPA does not generally apply where collectors “are engaged in no more than security-interest enforcement.”564 The Court based its ruling on the case before it on the assumption that the foreclosure law firm’s challenged conduct in the case was “required under state law.”565 “The only basis alleged for concluding that [the law firm] is a debt collector under the Act is its role in no
Prior to Obduskey, certain courts limited the FDCPA’s applicability to section 1692f(6) even where a person whose principal purpose of nonjudicial foreclosures engaged in any conduct related to or in some way furthering a foreclosure, and not just required by state law.577 This view is no longer viable after Obduskey.578
The term [“debt collector”] does not include—
(A) any officer or employee of a creditor while, in the name of the creditor, collecting debts for such creditor.591
The term [“debt collector”] does not include . . .
(B) any person while acting as a debt collector for another person, both of whom are related by common ownership or affiliated by corporate control, if the person acting as a debt collector does so only for persons to whom it is so related or affiliated and if the principal business of such person is not the collection of debts.598
FDCPA § 1692a(6)(B) provides an exclusion if the following are all applicable:
The term [“debt collector”] does not include . . .
(C) any officer or employee of the United States or any State to the extent that collecting or attempting to collect any debt is in the performance of his official duties;601
The term [“debt collector”] does not include . . .
(D) any person while serving or attempting to serve legal process on any other person in connection with the judicial enforcement of any debt;621
The term [“debt collector”] does not include . . .
(E) any nonprofit organization which, at the request of consumers, performs bona fide consumer credit counseling and assists consumers in the liquidation of their debts by receiving payments from such consumers and distributing such amounts to creditors;627
Congress, in 1986, repealed an exclusion from the scope of the FDCPA for attorneys when they were collecting a debt for a client in the client’s name and their collection efforts were within the legal concept of the practice of law.631 Congress found this exception had blossomed into a major loophole, and that some law firms had become indistinguishable from collection agencies.
The term [“debt collector”] does not include . . .
(F) any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent that such activity (i) is incidental to a bona fide fiduciary obligation or a bona fide escrow arrangement;633