By Andrew Chung
WASHINGTON (Reuters) - The U.S. Supreme Court on Tuesday appeared skeptical of widening the scope of who can be subject to a federal law targeting debt collectors' abusive practices by including those who buy debt, sometimes for pennies on the dollar.
The justices heard oral arguments in a proposed consumer class action lawsuit against Santander Consumer USA Holdings Inc over allegations it violated the Fair Debt Collection Practices Act. A lower court had dismissed the case brought by four Maryland residents who had defaulted on car loans.
That law typically applies to entities whose primary purpose is debt collection for others, not to lenders who give out and collect their own loans, such as banks or full-service finance companies.
The justices, both liberal and conservative, appeared concerned that players in the debt collection industry could evade the law merely by buying the debt, but suggested that the statute is not as elastic as the plaintiffs in the case view it.
"Just look at the language," liberal Justice Elena Kagan told the plaintiffs' lawyer, Kevin Russell. "Can you come up with a sentence that points to your reading?"
"I acknowledge that may not be the first interpretation that leaps to mind," Russell replied.
Companies that buy delinquent debt from the original lenders and then try to collect it from the borrowers are becoming a fast-growing segment of the multibillion-dollar debt collection industry. Debt buyers made $4.4 billion in revenue in 2015, according to legal papers.
The plaintiffs filed the class action in 2012 in federal court accusing Santander of violations of the debt collection law including misrepresenting debt loads and bypassing debtors' lawyers.
Their debts had been sold to Santander, a Dallas-based consumer finance company specializing in car loans, owned in part by a subsidiary of Banco Santander, the euro zone's second-largest bank by market value. Santander then tried to collect on the loans.
The Richmond, Virginia-based 4th U.S. Circuit Court of Appeals upheld the lawsuit's dismissal last March, saying the law applied only to debt collectors, and Santander became a creditor when it purchased the loans.
The U.S. Congress enacted the law in 1977 to regulate debt collectors, who might be less concerned about future business with the customer than original lenders and therefore willing to use abusive practices or harassment to recoup the money.
When conservative Chief Justice John Roberts suggested that as a debt collector Santander has less incentive to maintain goodwill, Santander's attorney Kannon Shanmugam countered that the company is not the kind of "fly-by-night" operation the law targets, and it might seek to sell other financial products to the clients.
Russell told the justices that the 4th Circuit decision could be used by companies that service debt to avoid the law by buying the defaulted loans. In court papers, the plaintiffs also said that increasingly common large debt buyers might try to evade the law by diversifying their businesses to ensure their primary purpose is not debt collection.
The plaintiffs were supported by a group of 28 states, including Oregon and Florida, and the District of Columbia, which said in legal papers that consumers see no difference between debt buyers and debt collectors and should be protected from unscrupulous tactics by both.
(Reporting by Andrew Chung; Editing by Will Dunham)