3rd Circuit Clarifies Meaning of “Debt Collector” under FDCPA “Principal Purpose” Definition

The Third Circuit recently held that a “debt collector” includes any entity whose “principal purpose” is the collection of any debt, regardless of whether the entity owns the debt it collects, for purposes of the Fair Debt Collection Practices Act (FDCPA).  In so deciding, the Third Circuit affirmed the district court’s finding that an entity was a “debt collector,” even when it owned the debt, because it met the “principal purpose” definition.

In this case, the plaintiffs alleged that problems arose when the bank that serviced their loan closed down and the plaintiffs stopped receiving periodic statements with requests for payment.  According to the complaint, the plaintiffs decided to discontinue making payments on the loan until they received a periodic statement from the loan’s new servicer.  However, when the bank closed, the Federal Deposit Insurance Corporation (FDIC), appointed as the receiver, declared the plaintiffs’ loan to be in default and sold it to the defendant.  In attempting to collect on the debt, the defendant mailed three letters to the plaintiffs demanding lump-sum payments and sent a notice containing a higher amount due, stating that the defendant intended to foreclose on the home.  The defendant later filed a foreclosure action in state court.  Consequently, the plaintiffs filed this complaint alleging that the defendant violated the FDCPA through its written and oral communications.

At issue here were the statutory definitions of “debt collector” under the FDCPA, which applies to (1) entities whose “principal purpose” is the collection of any debts, or (2) those who regularly collect debts owed another.  Previously, to determine whether an entity was a “debt collector” under the FDCPA, courts applied the “default” test to consider whether the obligation was in default when the assignment of the obligation occurred.  If the obligation was not in default at the time of the assignment, then the assignee of the obligation was not considered a “debt collector.”  However, the Supreme Court repealed the “default” test in Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718 (2017).  The parties in Henson did not litigate the “principal purpose” definition of “debt collector,” and the Supreme Court did not address it.

Henson was decided while the plaintiffs’ case was still pending in the district court, and so, the district court ordered additional briefing by the parties to address whether, in light of Henson, the defendant qualified as a “debt collector” under the “principal purpose” definition.  After this review, the district court decided in favor of the plaintiffs, finding that the defendant was a “debt collector” for purposes of the FDCPA.

On appeal, the Third Circuit began its discussion by noting that no other Circuit Court had yet opined on Henson’s applicability to the “principal purpose” definition of “debt collector.”  This was an issue of first impression.  The Third Circuit followed Henson’s example and proceeded by examining the plain text of the statute.  In its analysis, the Third Circuit agreed with the district court, stating that the defendant was considered a “debt collector” under the “principal purpose” definition because the defendant was not a financial institution or lender and there was no dispute that the defendant’s sole business activity is purchasing and then attempting to collect debts.  Therefore, because the defendant’s sole business is collecting debts it purchased, the Third Circuit held that the defendant met the “principal purpose” definition of “debt collector,” regardless of the fact that it owned the debt it collected.

The case is Tepper v. Amos Financial, LLC, and is available here.