Helping clients collect money owed them is a promising legal specialty. But lawyers must always comply with the Fair Debt Collections Practices Act (FDCPA).
The revenue potential in this legal area also heightens risk. The primary exposure is having an indebted party sue you for running afoul of the FDCPA. If you want to do collections work indefinitely, fully comply with the FDCPA. This will lower your chance of needing to use your lawyer’s professional liability (LPL) insurance policy.
If you already collect debt, you’re no doubt familiar with FDCP, and this article will provide a quick review. However, if you’re new to the specialty, it will help you master FDCPA’s provisions.
Congress passed the FDCPA in 1978 to prevent abusive debt-collection practices. These hurt consumers and attorneys who did business responsibly. By outlawing harmful business practices, Congress hoped to reduce debt collection’s “Wild West” nature. It hoped this would lower adverse societal effects, such as soaring personal bankruptcies, divorce, job losses and privacy infringement. It also wished to stop debt collectors who used unfair collection tactics to get a leg up on those who didn’t.
Over time, FDCPA has done an excellent job of reducing collection problems. But the law is far from perfect. According to Bob Carlson, former president of the American Bar Association, FDCPA promulgated conflicting rules that have spawned unfair “gotcha” litigation. It has also increased the cost of borrowing money. Despite these issues, FDCPA will likely remain on the books. This means collection attorneys must invest in FDCPA training for themselves and their non-attorney staff to reduce litigation and likely LPL premium hikes.
FDCPA Compliance in a Nutshell
What does FDCPA compliance entail? Lawyers and support staff should build their knowledge of the statute and prepare to adhere to the act’s provisions. Here are some essential elements of the law:
- What type of debt falls under FDCPA’s purview? The FDCPA only covers consumer loans for personal, family and household spending. It does not apply to corporate, business or agricultural borrowing.
- What type of debt collectors must comply with the law? FDCPA covers only collectors trying to secure payments owed to a third party and who, “…regularly collect or attempt to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” The crucial word is “regularly.” Under the FDCPA statute, attorneys are debt collectors if the percentage of their collections work compared to their other engagements is large enough to be considered “regular.”
- Which debt collectors fall outside FDCPA’s purview? This is a complex question. Reading the statute will help you understand what’s involved. Bottom line: FDCPA carve-outs include lawyers collecting what their clients owe; debts a lawyer has originated and sold to a third entity, while still servicing it; and debts not in default when acquired.
- Who is a “consumer” under FDCPA? The act considers consumers to be anyone who borrows money or is a spouse, parent (if the borrower is a minor), guardian, executor or administrator.
- Who can a debt collector speak to? FDCPA only allows debt collectors to speak with the consumer borrower, other parties mentioned above, debtor’s attorney, credit reporting entity and creditor (or that person’s attorney). Never discuss a debt matter with anyone else. Doing so might lead to a FDCPA privacy violation.
- Does FDCPA require consumer disclosures? When debt-collection engagements begin, attorneys must tell debtors they are attempting to collect a debt. They must also disclose that when a consumer provides information, they will use it for that purpose. Furthermore, initial demand letters must reveal the debt amount and the creditor’s name. They must also point out that the debtor has 30 days to challenge the debt. If the person does this in writing, attorneys must verify the debt amount and give the person a written confirmation. Finally, if a consumer requests the name and address of the original creditor (if not the same as the current creditor), attorneys must provide this information within 30 days.
- When are you allowed to contact a debtor? The law doesn’t permit contact before 8 a.m. or after 9 p.m.
- Is there a point after which you must stop contacting a debtor? There are three instances: if the debtor asks you to stop, if the person refuses to pay the debt or if the debtor has hired an attorney.
- What abusive collection practices does FDCPA forbid? The law does not allow consumer harassment, oppression or abuse. Prohibited methods include making violent threats, speaking obscenely, frequently calling, refusing to disclose one’s name and putting a loan up for sale to intimidate the debtor.
- What false or misleading communications are prohibited? The act outlaws debt-collection attorneys pretending they are federal or state officials; lying about the amount or status of the debt or claiming the power to have a debtor arrested or jailed.
- What types of unfair practices are prohibited? Examples include adding an interest or expense charge to the principal amount, illegally threatening to repossess the debtor’s personal property and failing to disclose the true purpose of a collection call in order to harm the debtor.
To avoid other prohibited debt-collection practices, read the FDCPA statute carefully and complete continuing education (CE) courses periodically.
FDCPA imposes strict liability. In other words, debtors don’t have to prove actual damages to sue for statutory relief. Class-action plaintiffs may sue for $500,000 in damages or 1% of the attorney’s net worth, whichever value is less. However, if you can prove you did not intentionally break the law, you may have a solid legal defense. Creating and documenting a FDCPA compliance program will help you establish this defense.
It is also important to be careful when writing consumer demand letters. For example, never say, “If we don’t receive payment in X days, we will consider other enforcement actions.” Why? Because any lawsuit threat that doesn’t produce litigation can be considered a false representation. Thus, if you’re considering mentioning or implying that legal action is possible, determine that you’ve met the criteria for taking this step. Making vague legal threats can get you in hot water if a court finds that an average consumer would likely see it as a direct threat. Bottom line: If you lack the authority or desire to file suit, don’t threaten to sue. It may have FDCPA implications.
Because debt collection is compliance-focused, everyone at your firm should follow the law closely. If they give information to credit agencies, they also are subject to the Fair Credit Reporting Act. Plus, if they accept electronic payments, the Electronic Funds Transfer Act (Regulation E) applies to them. State and local debt-collection regulations are also a factor. if your firm works in multiple states, this can be a heavy compliance lift. Solution? Closely supervise your team members, including non-lawyers. If you overlook a detail and a consumer notices it, you might receive an FDCPA claim and have to invoke your professional liability insurance.
Two additional points about FDCPA compliance:
First, never misrepresent the type of debt, amount owed or the legal status of the loan. Disclosing incorrect information to debtors can put your collection effort on perilous legal territory. To prevent this, validate all information about the case before contacting the debtor.
Second, always disclose that you are collecting a debt. As the disclosure requirements above mention, always remind consumers during each contact that you are collecting a debt. Identifying your name, firm and purpose will avoid misunderstandings that may result in a consumer complaint or malpractice claim later on.
Need for Legal Professional Liability Insurance
Debt-collections attorneys sometimes become the target of unwarranted FDCPA litigation. This can consume firm resources and increase your professional liability insurance premiums. Bob Carlson, former ABA president, stated that when Congress enacted FDCPA, attorneys doing legal work regarding debt were exempt from the act. However, in 1986, Congress eliminated this exemption; it assumed the revised act would apply only to attorney work outside court. It believed further that judges would supervise trials, with state Supreme Court and bar association oversight.
However, over time, courts have interpreted the expanded act to include all attorney litigation activities, both inside and outside court. “As a result,” said Carlson, “many attorneys pursuing legitimate collection lawsuits for clients are now unfairly sued for technical FDCPA violations that cause no harm to consumers.” Standard and allowed litigation practices can become issues if attorneys don’t comply with FDCPA permissions and disclosures.
In short, not only is FDCPA compliance important for all attorneys and staff working in collections, so is buying and maintaining malpractice insurance. Given the frequency of legitimate and frivolous lawsuits, it’s essential to protect your business with professional liability coverage. Not only will it pay for settlements or judgments resulting from a FDCPA violation, it will also pay for a vetted attorney to help you quickly dismiss nuisance litigation. This will free you up to focus on more significant business matters.