Fair Debt Collection Practices Act
Debtor protections laws have been around for years, although they are now receiving more attention given widespread credit card use and digital payment platforms. The primary federal statute governing debt collection is 15 U.S.C. §1601, known as the Fair Debt Collection Practices Act (FDCPA).
The FDCPA was enacted in 1977 and covers debt collection for personal, family, and household purposes, but not business related debts. For example, a mortgage or credit card debt is covered by the FDCPA, but not a small business loan from a bank. The intent of the law is to protect consumers against unfair collection practices. Consequently, the FDCPA imposes obligations on debt collectors to conduct their collection activities in a reasonable and ethical manner.
Is Your Business a Debt Collector?
As a preliminary issue, a business should first evaluate if it is a “debt collector” for purposes of the FDCPA. A “debt collector” is an entity (e.g. a law firm or collections agency) that regularly collects or attempts to collect, directly or indirectly through third parties, debts claimed by another party. Collection agencies, purchasers of delinquent debts, and collections attorneys are typical examples.
Loan servicers are not debt collectors unless the debt was already in default when the servicer took over the debt as is often the case in student loans. Original creditors are also not considered debt collectors unless they have a third party affiliate company that pursues overdue accounts.
Rules Debt Collectors Must Follow
The FDCPA imposes these obligations on debt collectors:
- A debt collector must communicate only with the debtor’s attorney if the debtor or the attorney has notified the debt collector that the debtor has legal representation. The debt collector may not contact the debtor.
- A debt collector must stop trying to contact a debtor if the debtor notifies the debt collector in writing to stop. The debt collector can contact the debtor if the debt collector plans on filing a lawsuit or wants to simply confirm that it will no longer attempt to contact the debtor.
- A debt collector may not phone a debtor at work, particularly if the employer states that the debtor cannot take personal calls at work.
- When a debt collector first contacts a debtor, the debt collector must identify the name of the creditor, state the amount of the debt, and provide the processes that were used to verify the debt.
- If the debtor disputes the debt, a debt collector must stop collection efforts until the debt collector provides documentation to the debtor explaining the debt (e.g. the financing documents for a car).
- If the debtor submits payment, the payment cannot be applied to the portion of the debt that the debtor disputes if disputed debts and undisputed debts are separated.
Aside from a debt collector’s obligations under the FDCPA, debt collectors are prohibited from engaging in a number of activities, which include, but are not limited to:
- Contacting the debtor outside the hours of 8AM to 9PM.
- Threatening criminal behavior such as physical harm or damage to property.
- Using profanity or degrading comments.
- Disclosing the names and contact information of the debtor to a third party unless it is a credit reporting agency.
- Making repeated calls with the intent to annoy the debtor. More than six calls per day would likely be considered excessive.
- Misrepresenting that a debt collector is affiliated with a government or law enforcement agency. This type of misrepresentation can take place verbally (over the phone) or in writing (collection notices).
- Intentionally misrepresenting the amount or status of the debt.
- Misrepresenting that a debt collector is an attorney.
- Misrepresenting that nonpayment of the debt will result in seizure of property or jail time.
- Implying that by selling the debt, the debtor will lose defenses to dispute the debt.
- Using deceptive practices to obtain additional information about a debtor.
- Failing to identify itself as a debt collector.
- Charging interest or fees that are not contemplated in the terms of the contract.
Review 15 U.S.C. 1692(d-f) for more on prohibited activities.
Penalties for Violations
The Fair Debt Collection Practices Act is enforced by the Consumer Financial Protection Bureau and the Federal Trade Commission both of which have the power to investigate alleged violations. The CFPB has provided guidance on practices that will require examination:
- Threatening action that the debt collector does not have authority to pursue (e.g. improper seizure or getting the person terminated from employment).
- Misrepresenting the amount or status of the debt.
- Failing to accurately post payments to a debtor’s account or charging unnecessary late fees.
- Misrepresenting that payment of the debt can positively affect the debtor’s credit report.
Examination by the CFPB can lead to monetary damages such as paying lost wages, direct damages, emotional distress damages, and statutory damages of $1,000. A debt collector may also be subject to injunctive relief and not surprisingly will suffer a damaged business reputation.
Policies to Prevent FDCPA Violations
To avoid penalties, a debt collector should implement a comprehensive set of internal policies and procedures to ensure its employees abide by the FDCPA. These policies and procedures should focus on:
- Training programs for employees on how to address consumers during initial and subsequent communications.
- Controlled marketing practices to avoid misrepresentations around consumer rights and references to credit reports.
- Compliance with other Federal Consumer Laws.
- Technology to improve record retention and bolster data security.
- Improving disclosures related to credit reporting.
- Accounting practices to be able to withstand audits around substantiating debts.