Avoiding the Pitfalls of Debt Collection

By Keith E. Whann

The collection of debts whether by the creditor or a debt collector, has become a complex issue given the evolving law surrounding debt collection. Two federal laws should be considered by any company involved in debt collection: The Fair Debt Collection Practices Act of 1978 (FDCPA) and the Federal Trade Commission’s Trade Regulation Rule Concerning Credit Practices (FTC Rule). Given that the FDCPA and the FTC both establish standards for proscribed conduct, define and restrict abusive collection acts, and provide specific rights for consumers, both laws must be considered by those involved in debt collection. Below is a brief outline of the types of conduct proscribed by these laws.

The Fair Debt Collection Practices Act
The FDCPA offers some of the strongest protection for consumers provided by any federal or state law regulating the activities of debt collectors. In addition, private remedies provided by the Act are available to “any person,” including employers, creditors, relatives, friends, and neighbors, who are affected by violations connected with consumer transactions.

The breadth of persons who may be held liable by the FDCPA extends mainly to debt-collection agencies and lawyers. According to the FDCPA, the term “debt collector” includes any person who uses interstate commerce or mail in any business, the principal purpose of which, is the collection of debts, and any person who regularly collects or attempts to collect consumer debts. It is important to note that the definition limits coverage to activities involved in the collection of consumer debts; commercial debts are not covered by the FDCPA. More specifically, those held liable under the Act include third-party debt collection agencies, creditors using false names that indicate a separate collector is involved or creditors collecting for other creditors, collection attorneys, repossession companies, debt poolers, check “guarantee” services, and suppliers or designers of deceptive forms that falsely imply that a third person is involved in collecting a debt. Examples of those generally excluded from the Act are persons who do not “regularly” engage in debt collection including creditors collecting their own debts, collectors’ employees collecting in the name of the creditor, government employees, business credit collections, non-profit credit counseling services, persons collecting a debt owed to another to the extent the debt was originated by the person, and enforcers of a security interest in an account used as collateral for a commercial loan. While the list provided appears limited to debt-collection agencies and attorneys, two points must be kept in mind: First, persons who fall just outside the exemption likely are to be considered debt collectors covered by the Act and second, several states have adopted regulations and statutes that mirror the Act but apply the proscriptions to all collectors of debt. In other words, more businesses may come under the umbrella of the FDCPA’s regulations than appear at first glance.

Moreover, to accomplish the consumer protection purpose of the FDCPA and to broaden the scope of the Act’s protection, courts apply a “least-sophisticated consumer” standard to analyze protections. Thus, the test is whether the least-sophisticated of consumers would have been deceived, misled, or harassed by the practices. The following is a noncumulative list of conduct prohibited by the FDCPA for those debt collectors covered by the Act:

The FDCPA limits collectors’ communications with a consumer by restricting the times and places a debt collector may contact a consumer, limiting third-party contacts with the consumer’s employer, friends, and relatives to specific instances, and prohibiting contacting a consumer represented by an attorney.
The Act prohibits harassing, oppressive and abusive conduct of any person. Examples of harassing and oppressive conduct includes threats to contact third parties, repeated telephone calls, threats of violence and criminal conduct, the use of obscene, profane and abusive language, and publishing a list of allegedly defaulting debtors, with a few exceptions
Collectors are prohibited from using false, deceptive, or misleading representations and collection methods in connection with the collection of any debt, including:

A. Misrepresenting imminence of suit, or intent or authority to sue when none exists;

B. Deceptive threats or statements;

C. False representations or implications that any individual is a lawyer or that any communication comes from a lawyer;

D. Falsely implying that the collector is vouched for, bonded by, or affiliated with the government;

E. Falsely representing the character, amount or legal status of any debt;

F. Falsely representing the services they have rendered or the compensation to which they are entitled;

G. Implying that nonpayment of any debt will result in the arrest or imprisonment of any person or the seizure, garnishment, attachment, or sale of any property or wages of any person unless the action is lawful and the debt collector or creditor intends to take such action;

H. Threats to take any action that cannot legally be taken or that is not intended to be taken;

I. Falsely implying that transfer of a debt will preclude a consumer’s claim or defense or will subject the consumer to a practice prohibited by the Act;

J. Misrepresenting that the consumer committed a crime or engaged in other misconduct in order to disgrace the consumer;

K. Communicating or threatening to communicate false credit information;

L. Using or distributing written material that gives a false impression of the collector’s source, authorization or approval;

M. Using false representations or deceptive means to collect or attempt to collect a debt or to obtain information about a consumer;

N. Except when acquiring location information from a third party, the collector must disclose that a communication is for the purpose of collecting a debt and that the information received will be used for that purpose;

O. Falsely implying that accounts have been transferred to innocent purchasers for value is prohibited;

P. Falsely implying that documents are legal process or are not legal process is prohibited. For example, a collection letter closely resembling the format, words, and type size and style of a court summons or complaint simulates legal process and is proscribed as well as sending a complaint and summons to a consumer before they are filed;

Q. Using any business name other than the true name of the collector’s business; and

R. Falsely implying that the collector operates or is employed by a credit-reporting agency.

In addition to the above list, the FDCPA provides a list of unfair or unconscionable collection means which are patterned after the FTC Act and are prohibited. Under the FDCPA, courts generally have construed “unfairness” to preclude practices that offend public policy, are immoral or oppressive, or cause substantial injury. For instance, collectors may not collect more than is legally owed or any amount that is not expressly authorized by the agreement creating the debt or permitted by law; they may not solicit, accept or deposit postdated checks; cause charges to be made to any person for communications by concealment of the true purpose of the communication, including collect telephone calls and telegram fees; repossess or threaten repossession when there is no right or intent to repossess, or when the property is exempt from repossession; use a postcard to communicate with a consumer regarding a debt; or include language and/or symbols on envelopes used for collection except for the collector’s address and name-if the name does not indicate the collector’s business.

Furthermore, the FDCPA provides explicit consumer rights including the right to stop the collection and to have the debt verified. A debt collector is required to stop its routine collection efforts upon receiving either a written request from a consumer to cease collection efforts or a written refusal to pay the debt. The collector may, however, advise the consumer that the collection efforts are being ceased, that the collector or creditor may invoke specified remedies that are ordinarily invoked, or notify the consumer that the collector or creditor intends to invoke a specified remedy. The FDCPA also gives consumers the right to obtain verification of a debt from the collector, and it regulates the content, placement and provision of the validation notice in order to assure that the notice is provided in a manner that effectively communicates its contents to the least-sophisticated of consumers. Other consumer rights include applying payments in accordance with the consumer’s directions when multiple debts are owed, and not bringing the suit in an inconvenient forum.

Even though the list of potential violations seems overwhelming, debt collectors may take some comfort in knowing that they may have a complete defense for unintentional violations resulting from “bona fide error”. The FDCPA states:

A debt collector may not be held liable in any action brought under this title if the debt collector shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adopted to avoid any such error.

To establish a defense under this provision, a debt collector will have to plead and prove by a preponderance of evidence that:

• The error was unintentional;
• The error was made in good faith;
• The error resulted from a clerical mistake, not a mistaken interpretation of law; and
• The collector maintained procedures reasonably adopted to check for and avoid such errors.

Federal Trade Commission Debt Collection Law
The Federal Trade Commission (FTC) also is active in bringing administrative action against debt collectors using “unfair or deceptive acts or practices” prohibited by the FTC Act. Many of the practices that have been considered unfair or deceptive in the FTC Act parallel the prohibitions listed by the FDCPA. The following examples of debt-collection abuses have been found to violate the FTC Act and to warrant FTC cease and desist orders prohibiting future similar deception or unfair practices:

Threats misrepresenting a collector’s intention to take legal action. Such threats of legal action violate the FTC Act if they are deceptive;
Sending dunning letters which simulate the appearance of telegrams because such letters misrepresent the nature, importance, cost, purpose and urgency of the communication;
Misrepresenting the existence of a debt or the amount due;
Using harassing or abusive telephone calls or letters;
Contacting or threatening to contact third parties;
Filing collection suits in courts distant from the consumer’s residence;
Misrepresenting the adverse impact of nonpayment upon a consumer’s credit worthiness;
Misrepresenting a fictitious collection agency as an entity separate from the collector;
Misrepresenting that a claim has been or will be transferred to an attorney or separate department of a collector;
Misrepresenting a collector’ s affiliation with the government;
Using subterfuge to obtain a consumer’s current address or place of employment;
Collection letters that simulate legal process; and
Advertising “easy credit” while using rigorous collection methods against delinquent consumers.

In order to codify and supplement the cases, the FTC has implemented informal guides against debt-collection deception. The guides are not self-enforcing but require case-by-case action by the FTC if businesses do not voluntarily comply. Unlike the FDCPA, the Guides are meant to apply to both creditors, including finance companies, retailers, and others within the FTC’s jurisdiction, as well as collection agencies. In addition the Guides apply to the collection of business debts as well as consumer debts. The Guides contain the following requirements and prohibitions:

Conspicuous disclosure of a communication’s purpose of collecting or obtaining information;
Prohibition against creating a false impression of a connection with a government agency;
Prohibiting the use of a name or other language falsely creating the impression that a firm is a credit bureau;
Prohibiting the use of a name, title, or other language creating the false impression that a firm is a collection agency;
Prohibiting, generally, misrepresentations regarding the services rendered by a collection agency in order to protect the original creditors.

In addition to the Guides, the FTC Trade Regulation Rule Concerning Credit Practices prohibits creditors from the following six practices:

Confessions of judgment, cognovits and other waivers of the right to notice; and
The debtor’s waiver of protections concerning property exempt from attachment or execution, such as waiver of a homestead exemption (this provision does not prohibit security interests in exempt property);
Assignment of wages or other earnings before judgment;
Non-purchase money security interests in household goods, but creditors can still take security interests in works of art, items acquired as antiques, jewelry (except wedding rings), and electronic entertainment equipment (except one television and one radio);
Pyramiding late charges by assessing more than one delinquency charge for one late payment (pyramiding late charges for a missed payment is not prohibited); and
The failure to provide cosigners with a specified warning indicating the potential obligations of a cosigner..........

Contrary to the FDCPA, there generally is no direct private right-of-action for a violation of an FTC Rule. A consumer can, however, challenge an FTC Credit Practices Rule violation under a state unfair and deceptive acts and practices (UDAP) statute that prohibits “unfair”, “deceptive” and/or “unconscionable” practices. Moreover, a violation of an FTC rule may be a per se state UDAP violation.

The laws governing debt collection can be quite complex. Businesses involved in debt collection, and creditors who are considering assigning accounts, should consider the implications of the Fair Debt Collection Practices Act and the Federal Trade Commission’s Debt Collection Laws, as well as applicable state law.