Collections is a rewarding area of the law. But only if you comply with the many regulations involved, especially the Fair Debt Collections Practices Act (FDCPA).
Collections can be a profitable area of the law. But the financial upside also brings a liability downside: getting sued for violating the Fair Debt Collections Practices Act (FDCPA). If you wish to sustain a collections practice long term, be sure to take your FDCPA obligations seriously. This will reduce your odds of needing to file a claim under your lawyer’s professional liability (LPL) insurance policy.
If you’re already active in collections, you’re probably familiar with the FDCPA and only need a quick refresher. If you’re new to the field, mastering this law should be a high priority. The statute, which took effect in 1978, was passed to reduce debt collection abuses. These hurt both consumers and attorneys who played fairly. By limiting harassing phone calls and false or deceptive demand letters, Congress hoped to limit the “Wild West” aspect of debt collection in order to reduce negative societal impacts such as higher personal bankruptcies, divorce, job loss and privacy violations. Another important objective was to level the playing field so that debt collectors who employ abusive practices don’t get an unfair competitive advantage over those who don’t.
Over the decades since its passage, the FDCPA statute has successfully reduced collection problems. But all has not been sweetness and light. According to Bob Carlson, former president of the American Bar Association, FDCPA created conflicting rules that have led to unfair “gotcha” lawsuits.” It has also increased what consumers pay for credit. Flaws notwithstanding, the statute is likely here to stay. This means collection attorneys must invest in FDCPA compliance for themselves and their non-attorney staff in order to avoid costly litigation and potentially higher LPL premiums.
FDCPA Compliance in a Nutshell
So what does effective FDCPA compliance look like? It involves a broad knowledge of the statute and adherence to the act’s proscriptions (and prescriptions). Here are some key points to keep in mind.
- What type of debt does the act cover? The FDCPA only covers consumer debt for personal, family and household expenses. It does not cover corporate, business or agricultural debt.
- What type of debt collectors does the act cover? It covers only collectors who are attempting to resolve debts owed to a third-party entity and who “regularly collect or attempt to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” The key word is “regularly.” Under FDCPA, attorneys are considered to be debt collectors if the percentage of such work compared to their overall practice is large enough to be considered “regular.”
- What type of debt collectors doesn’t FDCPA cover? This is a complex question, so be sure to read the statute. Several major exclusions include entities collecting their own debts under their own name, debts they originated and then sold to a third party but continue to service and debts that weren’t in default when they were acquired.
- How does the act define “consumer”? When it comes to communicating with a consumer about debts, “consumer” is defined as the borrower or the borrower’s spouse, parent (if the borrower is a minor), guardian, executor or administrator.
- Who may you contact regarding a debt matter? The FDCPA only lets you contact the consumer, the other entities mentioned above, the consumer’s attorney, a reporting agency and the creditor (or the creditor’s attorney). Be sure not to discuss the matter with anyone else, as you might violate the privacy provisions of the act.
- What consumer disclosures does the FDCPA require? At the beginning of the debt-collection engagement, attorneys must disclose to the debtor they are trying to collect a debt. They must also disclose that any information received will be used for that reason. In addition, the initial demand letter must include the debt amount, the creditor’s name and the fact that the debtor has 30 days to challenge the debt. If the person questions the debt in writing, the attorney will verify the debt amount and give the consumer a copy of the verification. Finally, if the consumer makes a written request within 30 days for the name and address of the original creditor if different from the current creditor, the attorney will supply that information.
- When are you allowed to contact a debtor? The FDCPA statute prohibits consumer contact at unusual times, generally before 8:00 a.m. or after 9:00 p.m.
- When are you required to stop contacting a debtor? There are three situations in which you must stop all contact: if the debtor asks that you stop communicating with him or her, if the person refuses in writing to pay the debt or if the debtor has retained counsel.
- What types of abusive collection practices are prohibited? FDCPA does not allow harassing, oppressing or abusing debtors. It outlaws a number of different practices, some of which include: threatening violence, using obscene language, calling repeatedly, contacting without identifying oneself and advertising a debt for sale in order to coerce the debtor.
- What types of false or misleading communications are outlawed? The act also prohibits debt-collection attorneys from identifying themselves as federal or state officials; misrepresenting the character, amount or status of the debt; or threatening a debtor with arrest or imprisonment, among other misleading practices.
- What types of unfair practices aren’t allowed? Several notable ones include adding an interest or expense charge to the principal amount owed that the original debt agreement does not authorize, threatening the debtor with repossession of personal property when the creditor has no right to do so and saddling the person with collect telephone or telegram charges by concealing the true purpose of the call.
There are many other prohibited debt-collection practices. To assure that you and your support staff (if any) remain in compliance, read the statute carefully. Also consider engaging in continuing education to stay on top of the latest court rulings that may affect your future FDCPA risk exposures.
FDCPA Penalties
It’s also important to understand that the FDCPA imposes strict liability. This means debtors don’t have to prove actual damages in order to sue for statutory relief of up to $1,000 (plus legal fees). Plaintiffs in a class action may sue for damages of up to $500,000 or 1% of the attorney’s net worth, whichever amount is less. However, if you can prove a bona fide error—i.e., that you did not intentionally violate the law—you may have a solid legal leg to stand on. Developing and documenting a robust FDCPA compliance program will help you advance this argument.
In addition to the guidelines addressed above, it’s essential to pay close attention to how you word your consumer demand letters. For example, never say: “If you don’t pay within X days, we will be forced to consider other enforcement options.” This is problematic because any litigation threat that doesn’t result in actual litigation may be considered a false representation under FDCPA. So if you’re considering mentioning or implying that legal action is on the table, make sure you’ve met the criteria for actually taking such action. Even making implicit or veiled legal threats can get you in trouble if a court finds that an average consumer would likely interpret it as a direct threat. Bottom line: If you don’t have the authority or inclination to file suit, don’t threaten to do so; it may have FDCPA consequences.
Because the debt collection field is so compliance driven, it’s important for everyone on your team to follow the letter of the law. This can be a daunting challenge since collection attorneys aren’t just bound by FDCPA requirements. If they supply data to credit agencies, they also come under the purview of the Fair Credit Reporting Act. Plus, if they accept electronic payment, now they’re subject to Electronic Funds Transfer Act (Regulation E) compliance. And let’s not forget state and local debt-collection regulations, which, if your firm works in multiple jurisdictions, can pose a heavy compliance burden. The upshot? Make sure to adequately supervise everyone on your team, including non-lawyers. If you let a detail slip through the cracks and a consumer picks up on it, you might get hit with an FDCPA claim and have to use your professional liability insurance.
According to Donald S. Maurice, president of Maurice & Needleman, P.C., a Flemington, NJ law firm, the American Bar Association’s (ABA) ethics rules require debt-collection attorneys with “managerial authority” to put in place measures assuring that all lawyers and non-lawyers on the team comply with relevant ABA Rules of Professional Conduct (Model Rules 5.1 and 5.3.). Writing on the ABA website, Maurice warned that failing to professionally supervise non-lawyers assisting with collections may also result in them running afoul of ABA Model Rule 5.5, which addresses the unauthorized practice of law. To avoid problems, Maurice provides the following pointers to attorneys active in the debt-collection arena:
- Evaluate non-attorneys who are doing file reviews. Ask yourself if their skills and experience are sufficient for them to fully understand litigation practices, credit instruments and the fine details of compliant debt collection.
- Determine whether non-attorneys are engaged in the unauthorized practice of collections law.
- Implement a compliance group to periodically assess firm activities to make sure lawyer and non-lawyer practices are adhering to relevant statutes.
- When compliance lapses come to light, fix them immediately and then take action to prevent future problems from arising.
- Consider naming an internal or external ethics counsel to help with lawyer and non-lawyer training and to provide advice on how to address client complaints and litigation.
There are two important additional points about FDCPA compliance. First, work hard to never misrepresent the type of debt, amount owed or the legal status of the debtor’s obligations. Disclosing incorrect information to them will often put your collection effort on shaky legal grounds. Thus, as we mentioned earlier, take the time to validate all information relating to the debt before you contact the debtor.
Second, always disclose that you are collecting a debt. We discussed this in the disclosure requirements above. But to be extra safe, remind consumers in every subsequent communication that you are engaged in collection. Identify your name and firm and remind the debtor every time you get in contact about your role. This will prevent misunderstandings that may generate a consumer complaint and/or a malpractice lawsuit.
Importance of Legal Professional Liability Insurance
If you have been in debt collection for a while, you know how attorneys can become the target of unwarranted litigation under FDCPA. This can consume firm resources and increase your professional liability insurance premiums. According to Bob Carlson, former ABA president, when the FDCPA was first enacted in 1977, attorneys engaged in legal activities around debt collection were exempt from the act. But in 1986, Congress eliminated that exemption, assuming that the revised act would apply only to attorney collection work outside the courtroom. It assumed judges would oversee trial work, with oversight from state supreme courts and state bar associations.
However, over the years courts have expanded the purview of the revised act to include all attorney litigation activities, both within and outside the court. “As a result,” says Johnson, “many attorneys pursuing legitimate collection lawsuits for clients are now unfairly sued for technical FDCPA violations that cause no harm to consumers.” Standard and permissible litigation practices can become problems if attorneys don’t check off FDCPA permissions and disclosures.
At the end of the day, not only is FDCPA compliance essential for all attorneys and staff working in the collections field, so is having malpractice insurance. Given the frequency of lawsuits, both warranted and frivolous, it’s important to shield your business with professional liability coverage. Not only will it pay for any settlements or judgments arising from a FDCPA violation, it will provide a vetted attorney to help you quickly dispense with nuisance litigation. This will free you up to focus on more important business matters. What’s not to like about that?
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