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Of ECOA and the FDCPA – A Tie in the Supreme Court and A Fourth Circuit Win for Debt Collection

    Client Alerts
  • March 28, 2016

It was a busy week in the fabled halls of justice last week as judges undoubtedly worked to get out a few more opinions before Easter break. Two opinions, one from the Supreme Court and one from the Fourth Circuit Court of Appeals, were particularly noteworthy. So carry on, dear reader, and find out the latest on ECOA and the FDCPA. 

ECOA and the Supreme Court

As readers of my updates will recall, it has been a little over a year since the Supreme Court agreed to hear a case from the Eighth Circuit (Hawkins v. Community Bank of Raymore) dealing with whether guarantors were “applicants” entitled to sue for ECOA violations, or whether only borrowers could sue. (You can find my prior post on the topic here) On March 22, 2016, we got an answer from the Court, although it was not the clarifying answer we expected.  In fact, the opinion was all of a whopping nine-words long: “The judgment is affirmed by an equally divided Court.” 
The Hawkins opinion is the first evenly split decision from the Supreme Court since Justice Scalia’s death left the Court with only 8 members. When the Court is equally split and the lower court opinion is affirmed, that means that while the opinion below governs the parties to that case (good news for the Community Bank of Raymore), the decision lacks precedential value and does not apply to other parties (bad news for other lenders hoping to keep guarantors from suing under ECOA). 
So where does that leave lenders? Exactly where things stood before Hawkins. In other words, the interpretation of ECOA will vary between federal circuits with some (like the Eighth) taking a position favorable to lenders and others (like the Sixth) being more favorable to borrowers. The Fourth Circuit has yet to specifically weigh in on the issue, but a definitive nationwide interpretation of the law will just have to wait for another day when the Court is restored to its full complement of nine justices. So in the meantime, lenders will still have to defend against ECOA violation claims filed by guarantors (at least in some parts of the country). 

FDCPA and the Fourth Circuit

Meanwhile, buyers of consumer debt can cheer the Fourth Circuit’s opinion in Henson v. Santander Consumer USA, Inc. (March 23, 2016). That case involved car loans originated by CitiFinancial Auto. When the borrowers defaulted on the car loans, Citi repossessed and sold the vehicles, leaving deficiency balances. Citi then bundled those loans and sold some $3.5 billion of them to Satander. (Prior to the purchase, Satander had acted as a debt collector in trying to collect the deficiencies on behalf of Citi.) The plaintiffs filed a class action against Satander claiming that it violated the FDCPA by taking inappropriate actions to collect the debt (including alleged misrepresentations to consumers). The trial court dismissed on the ground that the FDCPA did not apply to Satander’s actions and the Fourth Circuit affirmed. 

The key point of dispute was whether Satander was a “debt collector” or a “creditor” under the FDCPA. Plaintiffs argued that Satander was a debt collector since it purchased the loans after they had already defaulted. The Fourth Circuit disagreed:

We conclude that the default status of a debt has no bearing on whether a person qualifies as a debt collector . . . With limited exceptions, a debt collector [] collects debt on behalf of a creditor.  A creditor, on the other hand, is a person to whom the debt is owed, and when a creditor collects its debt for its own account, it is not generally acting as a debt collector.

Since the plaintiffs only alleged that the inappropriate activity occurred after Satander became the owner of the debt (rather than during the time it was acting as a debt collector on behalf of Citi), the Court held that the FDCPA claim failed on its face. 

The Morals

        (a) It is good to have an odd number of justices on the Supreme Court if you are looking for  resolution on disputed issues.  
        (b) Don’t forget to include ECOA waivers in all your loan modifications, forbearance agreements, and other similar documents. A properly drafted ECOA waiver will bar guarantor ECOA claims.
        (c) Creditors, go forth and collect that debt. But just because you may not be subject to the FDCPA in doing so, don’t forget that there are plenty of state consumer protection statutes out there which might nevertheless apply (such as the North Carolina Fair Debt Collection Practices Act), so govern yourself accordingly.

Questions regarding this case update or financial services litigation can be addressed to Will Esser at / 704-372-9000. This legal update does not constitute the provision of legal advice or the creation of an attorney/client relationship with any party.