(Adds background on dispute, paragraphs 3-10)
By Andrew Chung
NEW YORK, Jan 13 (Reuters) - The U.S. Supreme Court on Friday agreed to decide whether firms collecting on debt they bought for pennies on the dollar can be held liable in lawsuits brought by debtors they targeted under a federal law cracking down on debt collectors' abusive practices.
The justices agreed to review a lower court's decision to dismiss a consumer class action lawsuit against Santander Consumer USA Holdings Inc over allegations it violated the Fair Debt Collection Practices Act.
Companies that buy delinquent debt from the original lenders and then go out and collect it from the borrowers are becoming a fast-growing segment of the multibillion-dollar debt collection industry. The case taken by the high court could have a major impact on these debt buyers.
The U.S. Congress enacted the debt collection law in 1977 to prohibit collectors from using abusive, unfair or deceptive practices to recoup money.
The current case hinges on the definition of "creditor" and "debt collector" and whether a company that buys debt should be treated as a creditor and therefore not subject to the law.
Four Maryland residents who defaulted on car loans filed a proposed class action lawsuit against Santander in 2012 in federal court alleging violations of the debt collection law, such as misrepresenting debt loads and bypassing debtors' lawyers.
The debts had been sold to Santander, a Dallas-based vehicle-financing and lending company 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 4th U.S. Circuit Court of Appeals in Richmond, Virginia threw out the lawsuit last March, saying the law applied only to debt collectors, and Santander became a creditor when it purchased the loans.
The Maryland residents told the Supreme Court the 4th Circuit's reasoning would "hamper both government and private efforts to combat abusive debt-collection practices." They also noted that appeals courts are divided nationwide on the issue, with some calling debt buyers creditors and others calling them debt collectors.
Santander told the high court that the 4th Circuit correctly interpreted the law and that full-service consumer banks are less likely to commit abuses than debt collection companies because of their standing in the community.
The appeal to the Supreme Court comes as the U.S. watchdog for consumer finances, the Consumer Financial Protection Bureau, is considering proposals to toughen regulation of the industry.
The case is Ricky Henson et al v. Santander Consumer USA, Inc et al, in the Supreme Court of the United States, No. 16-349. (Reporting by Andrew Chung; Editing by Will Dunham)