Federal Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act was enacted to prevent consumers from harassment and deception. This is largely a case of legislation being created to stop the practices of a small, but outspoken, minority of creditors. Politicians wanted to prevent creditors from sending threatening and false collection letters and bothering people during unreasonable times. The problem with the Act is that, due to convoluted rules, it is very difficult for the majority of creditors to collect debts in a fair and honest manner.

Application to Homeowners Assessments

The act applies to "consumer" debts. Consumer debts are debts incurred, or alleged to be incurred, by natural persons in transactions involving money, property, insurance or service used primarily for personal, family or household purposes.¹ "Consumer debts" has been defined and redefined in an infinite number of appellate and district court cases. Over the past few years, we have also seen it defined to include homeowners assessments and defined not to include homeowners assessments.²

Federal law states that district court decisions carry no more weight in a particular jurisdiction than an appellate case in another circuit. Thus, if an appellate court has not made a ruling in your circuit, the issue is still undecided. However, if the issue is undecided, it makes sense to act as though the federal Act does apply to your collection attempts.

Who is Bound by the Act

The Federal Act only applies to third party creditors, and not to the creditor itself. Thus, attorneys, collection agencies and management companies³ will be bound. However, managers who are actually employed by the association (as compared to independent contractors), as well as board members, will not be bound by the Federal Act⁴.

But, be on the lookout. Several states have included their own version of the Act in state law and have included slightly different guidelines. For example, in California the legislators have enacted the California Fair Debt Collection Practices Act⁵ which includes creditors in the long list of potential defendants under the statute.

Also note that this statute imposes personal liability. Thus, individual employees of collection agencies or management companies can have personal liability even if the employee was acting in his/her capacity as an employee. Likewise, paralegals and law clerks can also be liable and may not successfully defend a suit by saying that the supervising attorney told them to take that action.

A person is only considered to be a debt collector when he or she is actually collecting a debt. So, the collection of assessments on a monthly basis will not trigger liability. It is only the collection of past due assessments that matters under this law.

Intent Is Not Required

The Federal Act is a strict liability act. That means that a court does not consider whether the violator intended to violate the act or even whether the violator knew that he or she violated the Act.⁶ However, there are some defenses to a claim that sound very similar to a "lack of intent" defense. For example, clerical mistakes which would not normally arise because of the way an office is organized will defeat a claim. Thus, mistakes may be defensible in certain situations. But certainly, the same mistake cannot be made over and over again.

Limits on Communications with Debtors

The Federal Act restricts the time in which communications can be made to debtors, unless permission is given by the debtor to contact him/her at specific times. This will not usually affect a creditor if the creditor makes phone calls during business hours. However, if a debtor states that he or she does not want to be called at work or during certain hours, then the creditor must abide by his/her wishes. It is presumed that reasonable hours of contact are between 8:00 a.m. and 9:00 p.m., but the debtor is allowed to choose other hours that he or she finds more reasonable⁷.

It is good practice to ask the debtor if you can call him/her at work and thereafter send out a confirmation letter stating that you can call him/her at work. This is very important when you will be faxing the debtor at work. Likewise, if the debtor has stated that he or she does not want to be contacted at work, this should be well documented in the file.

Case law has shown us that there can be liability for calling too many times or calling after the creditor has been told not to call. The better alternative is to put everything in writing. For whatever reason, case law suggests that letters are not nearly as threatening as long as they are written in compliance with the law.⁸

Never contact a debtor represented by an attorney. This should be any creditor's practice anyway. But as an extra incentive, deviations in your practice will now mean civil liability as well. If the attorney fails to respond after a reasonable amount of time has passed, then the creditor may contact the debtor directly.⁹

Communications with Third Parties

The Federal Act also contains restrictions on communications with people other than the debtor. Do not contact third parties in order to collect the debt. This includes the debtor's family, friends or employer, but not the debtor's spouse. Reasonable contacts may be made to collect on the judgment (e.g., serving an employer with a writ). Contact may also be made to ascertain the debtor's location, but absolutely nothing more than that.

When obtaining information as to the debtor's location, you must disclose who you are and that you just need the address. You may not mention anything about the debt or that you are a debt collector or creditor. This is just the opposite of discussions with the debtor. When speaking to a debtor, you must say what you are calling about. When talking to third parties, privacy is more important. You may only contact third parties to obtain the location once. There are very specific ways to ask twice but please talk to counsel before trying on your own. Also, you may not contact a third party if the debtor is represented by counsel.

The Act's primary goal is to ensure that creditors do not engage in deception or lying. This would include lying about the amount of the debt or the status of the action. Therefore, do not say you have taken some action unless you have. You may not state that it is a final demand before filing suit unless it really is a final demand.¹⁰ "Deadbeat lists" are definitely forbidden under the statute, as would be the use of obscene language. The Act also specifically prohibits threatening to enforce a security interest that is unenforceable. Thus, if the lien has been "wiped out" as a result of a previous foreclosure or a bankruptcy, you may not tell the debtor that you intend to initiate foreclosure proceedings.

Disclosure Statements

In every communication sent to the debtor a disclosure statement must be included. The disclosure should state that "the debt collector is attempting to collect a debt and any information obtained will be used for that purpose". This disclosure is not necessary in formal pleadings. The best way to do this is to have it preprinted on your letterhead, so that you never forget to include it. You may also wish to have a special stamp made.

Verification Notice

Within five days of the first communication with the debtor a validation must be sent out which states:

1. the debt amount
2. the name of the creditor
3. that the debt will be assumed to be valid unless disputed within 30 days of receiving notice
4. that if within 30 days the debtor sends written notification that the debt is disputed the creditor will send a verification of the debt or a copy of the judgment
5. that the collector will provide the debtor with the name and address of the original creditor upon written request within 30 days

This must be sent out by each office that collects. Therefore, the management company and the attorneys, trustee or collection agency must

send it out. It must also be sent out even if the first communication is the summons and complaint. You may wish to make a form letter for this purpose that will be included in any other initial mailings.

After the debtor requests a verification of the debt, all collection attempts must stop until after the verification is provided. However, because of the way that you should already be doing business, the chances are good that you have already sent something out stating how the debt accrued, thus you may be able to just refer the debtor back to the accounting. However, if the debtor disputes a particular aspect of the accounting or a particular charge, you must address the dispute before doing anything else.¹¹

Unfair Practices

The Act prohibits creditors from accepting or cashing checks post-dated for more than five days unless a notice is sent prior to negotiating the check to the debtor.¹²

Continuing along with the concept of protecting the debtor's privacy, the creditor is prohibited from sending postcards requesting payment of the debt. Likewise, do not put anything on the envelopes that would indicate that you are collecting a debt.

It is unlawful to collect the wrong amount or to collect fees that are not authorised by law. For example, if attorney's fees are not recoverable in your state, you cannot request that the fees be paid. Likewise, you may not represent that you will be taking a particular action which you cannot possibly take. For example, you may not state that foreclosure proceedings will be initiated immediately, if in reality the Marshall or sherif will not be able to even begin their part of the proceedings for another month.¹³

A Final Word

Because the case law interpreting the Act is created on a seemingly daily basis, it is important to keep abreast of the changes. The Federal Trade Commission (the regulatory agency for the Act) maintains a web site with reprints of the Federal Trade Commission opinion letters. While not binding, these opinions do give creditors a better idea of where the law is heading. The site is at http://www.ftc.gov.

Footnotes:

1. 15 USC section 1692(3),(5).
2. Ladick v. Van Gemert (10th Cir. 1998) 146 F3d 1205, 1207 (yes); Newman v. Boehm Pearlstein & Bright, Ltd. (7th Cir. 1997) 1119 F3d 477, 479 (yes); Theis v. Wyman (SD CA 1997) 969 F.Supp. 604, 607-608 (yes); Azar v. Hayetr (ND FL 1995) 874 F. Supp. 1314, 1318, (no, affirmed by 11th Circuit); Bryan v. Clayton (D FL 1997) 698 S2d 1236, 1237 (no); Riter v. Moss & Bloomberg, Ltd. (ND Ill 1996) 932 F Supp 210 (yes); Nance v Petty, Livingston, Dawson, & Devening (WD Va 1994) 881 F. Supp. 223 (no).
3. One federal case out of Minnesota entitled Alexander v. Omega Management, Inc. found that a management company was not a debt collector under the statute because debt collection was a very minor part of the company's operations. However, this case seems to be inconsistent with other cases which have had opposite holdings.
4. 15 USC section 1692a (6).
5. California Civil Code sections 1788-1788.32.
6. Russell v. Equifax ARS (2nd Cir. 1996) 74 F3d 30; Savino v. Computer Credit, In. (ED NY 1997) 960 F.Supp. 599, 605.
7. 15 USC section 1692(a)(1).
8. One California case favored the creditor where the creditor had sent forty eight demand letters in an eight month period. Masuda v. Thomas Richards & Co. (CD CA 1991) 759 F. Supp. 1456.
9. 15 USC 1692c(a)(2)
10. Interestingly enough, what you may consider normal conversation may be considered harassment under this law because the courts use the "least sophisticated debtor standard". This means that you must look at the debtor and determine what the debtor may perceive your actions to mean, not what you actually intended. Masuda v. Thomas Richards & Co. (CD CA 1991) 759 F. Supp. 1456, 1465.
11. In a 1999 federal case entitled Garner v. Kansas out of Louisiana an attorney got into trouble with this one. The letter stated that the debtor had thirty days to verify the debt, but it also said that the debt need to be paid within seven days of the letter. The court found that this sent a conflicting message because the debtor could not possibly have realized that collection activities would cease if he disputed the debt. Basically, the court stated that had the attorney explained the contradiction in the letter, the letter would have been fine.
12. 15 USC section 1692 (2).
13. Crossley v. Lieberman (3rd Cir. 1989) 868 F2d 566; Cacace v. Lucas (D Conn 1990) 775 F. Supp. 502.