Consumer Debt Collection FDCPA Traps for the Unwary Nationwide Lender Loan Servicer Debt Collector Part II

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May 2005

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Feature

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Consumer Bankruptcy

Consumer Debt

Legislation

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<h4>State Debt Collection Laws</h4>

The federal Fair Debt Collection Practices
Act (FDCPA) applies to debt-collection practices throughout the nation,
even those that are purely intrastate in nature, and thus it essentially
is a "uniform" law in every state. However, state laws governing
debt-collection practices deemed to be "more protective" of the consumer
than the FDCPA are exempt from federal preemption, and there is no
uniformity in the state laws, which purport to govern the activities of
nationwide lenders and loan servicers within the states. Only seven
states have no statutes that address debt-collection
practices.<a href="#1" name="1a">1</a> The
remaining states regulate debt-collection practices by either direct
regulation or indirect regulation via a general consumer-protection
statute.<a href="#2" name="2a">2</a>

Additionally, application of each state's law typically hinges on unique
statutory definitions (and limitations) of the terms "debt collector"
and "collection agency."

State laws regulating debt-collection practices vary considerably in
definitions, exemptions, prohibited practices and penalties imposed for
their violation. Moreover, many of the state laws are themselves not
clear and can be subject to varying interpretation. Forty-one states
(plus Puerto Rico) have statutes that can be fairly construed to
regulate the debt-collection practices of "collection agencies" and
other "third-party" debt collectors,<big><a href="#3" name="3a">3</a></big>—i.e., collectors other than the
original creditor collecting in its own name. Thirty-two states have
laws on their books that may reach the collection practices of creditors
collecting their own debts in their own names.<a href="#4" name="4a">4</a> Additionally, the statutes in 38 states
may be fairly construed to regulate the collection practices by
creditors collecting their own debts if, in the process of collecting
their own debts, the creditor "uses another name which would indicate
that a third person is collecting or attempting to collect the
debt."<a href="#5" name="5a">5</a>

A detailed review of every state's laws governing collection
practices is beyond the scope of this article. Nonetheless, the
following provides insight as to how state laws may specifically affect
lenders and creditors.

<h4>State Regulation of "Collection Agencies" and Creditors Collecting
Their Own Debts Using Another Name</h4>

As is provided under the FDCPA, many states seek to exempt creditors
collecting their debts in their own names from regulation, while still
regulating creditors using names other than their own to collect their
own debts. Several states do this by defining the terms "collection
agency" or "debt collector" to include persons who, in the process of
collecting their own debts, use names other than their own, indicating
that a third person is collecting or attempting to collect the debts.
The laws in the 38 states regulating the collection practices of
creditors "collecting debts in names other than their own" can be a
great source of confusion for lenders trying to determine whether or not
they are subject to the state's regulations, in part due to exemptions
that sometimes appear inconsistent with coverage.

For example, Arkansas regulates the practices of "collection
agencies" and defines "collection agency" to include persons using a
"fictitious" name or a name other than their own to collect their own
debts.<a href="#6" name="6a">6</a> But
Arkansas also provides an exemption from the regulations for "collection
agencies" that is confusing and potentially inconsistent with the scope
of who might be considered a "collection agency" under the state's
definition of that term. Specifically, Arkansas law exempts "regular
employees of a single creditor" from the regulations applicable to
collection agencies.<a href="#7" name="7a">7</a> Whether this exemption means that an
entity in the "exempted" category remains exempt if it collects debts
using names other than its own is not clear from reading the statutes.
Thus, the nationwide lender or loan servicer faces the difficult problem
of determining whether or not it can be deemed a "debt collector" or a
"collection agency" under a particular state's law, and if so, whether
it is entitled to an exemption from regulation.

<h4>State Regulation of Creditors Collecting Debts in Their Own
Name</h4>

Of more obvious concern to lenders are the majority of states whose
laws govern all persons collecting debts, including creditors collecting
their debts under their own names. Although there is less of an issue in
these states as to whether the creditor is subject to the regulations,
the prohibited practices and penalties vary widely, and the prohibited
practices are usually more extensive than those prohibited under the
FDCPA.

Some states regulating the actions of creditors in communicating with
debtors partially mirror provisions of the federal FDCPA.<a href="#8" name="8a">8</a> For example, while Connecticut
and New York laws cover creditors collecting debts in their own names,
the prohibited practices and abusive conduct described in those states'
laws essentially mirror the conduct prohibited by the FDCPA for
third-party debt collectors under 15 U.S.C. §1692d.

Other states impose prohibitions on creditors that are broader than
those applicable to third-party debt collectors under the FDCPA.
California law, for example, regulates all those who collect debts and
defines "debt collector" to mean "any person who, in the ordinary course
of business, regularly on behalf of himself or others, engages in debt
collection."<a href="#9" name="9a">9</a>

California law thus specifically subjects creditors collecting their own
debts to its reach. In collecting debts, California law prohibits, for
example, communicating with the debtor "with such frequency as to be
unreasonable and to constitute (sic) harassment to the debtor under the
circumstances."<a href="#10" name="10a">10</a>

Florida's "Consumer Collection Practices" statute also prohibits
certain practices by "any person" in the collection of consumer
debts,<a href="#11" name="11a">11</a> which
has been interpreted by the courts to include creditors collecting debts
in their own names.<a href="#12" name="12a">12</a> Practices prohibited under the Florida
statute are broader and more ambiguous than those prohibited by the
FDCPA. For example, in the collection of consumer debts, the Florida
statute prohibits a creditor from, among other things, "willfully
communicat[ing] with the debtor or any member of his family with such
frequency as can reasonably be expected to abuse or harass the debtor or
any member of his or her family."<a href="#13" name="13a">13</a> Given the subjective nature of this
standard, how is the creditor to know what degree of communication "can
reasonably be expected" to harass the debtor? Florida courts have held
that this is a question for the jury.<a href="#14" name="14a">14</a>

<h4>State Regulation of Debt Collection Through General Consumer
Protection Statutes</h4>

Courts in several states have also broadly interpreted general
consumer protection statutes to reach the conduct of creditors and
third-party debt collectors while collecting consumer debt. Depending on
the state, such statutes may provide remedies against debt collectors
and creditors that include injunctive relief, attorney's fees and treble
damages. Therefore, although a state may not have a specific "debt
collection" law, powerful and intimidating statute-based liability may
be imposed via a consumer protection claim. In Ohio, for example, the
consumer protection regime has been interpreted to reach conduct by
"both an original creditor and any collection agency hired by the
original creditor."<a href="#15" name="15a">15</a> Likewise, the Montana Supreme Court has
held that the state's Unfair Trade Practices and Consumer Protection
applies to banks in the lending and collection of consumer
loans.<a href="#16" name="16a">16</a>

<h4>Conclusion</h4>

The preceding examples represent only a few of the variations within
the state laws that regulate creditors and provide greater protection
for consumers than the FDCPA. State statutes that reach debt-collection
practices typically apply to such activities involving their residents,
whether or not the debt collector is within the state, and include
provisions awarding attorneys fees and statutory damages to aggrieved
consumers. Therefore, nationwide lenders and loan servicers must
thoroughly understand and comply with the laws in every state in which
they communicate with debtors, or run the risk of expensive consumer
lawsuits.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> Alabama, Delaware,
Mississippi, Oklahoma, Rhode Island, South Dakota and Virginia. <a href="#1a">Return to article</a>

<a name="2">2</a> See Tables 2 and
3. <a href="#2a">Return to article</a>

<a name="3">3</a> See Table 2. <a href="#3a">Return to article</a>

<a name="4">4</a> See Table 1. <a href="#4a">Return to article</a>

<a name="5">5</a> See Table 1. <a href="#5a">Return to article</a>

<a name="6">6</a> See Ark. Code Ann.
§17-24-101 (2004). <a href="#6a">Return to article</a>

<a name="7">7</a> See Ark. Code Ann.
§17-24-102(a)(1) (2004). <a href="#7a">Return to article</a>

<a name="8">8</a> See Table 4. <a href="#8a">Return to article</a>

<a name="9">9</a> Cal. Civ. Code
§1788.2 (2004). <a href="#9a">Return to article</a>

<a name="10">10</a> Cal. Civ. Code
§1788.11 (2004). <a href="#10a">Return to article</a>

<a name="11">11</a> Fla. Stat. Ann.
§559.72 (2004). <a href="#11a">Return to article</a>

<a name="12">12</a> See Schauer v.
General Motors Acceptance Corp., 819 So. 2d 809 (Fla. 4th DCA 2002).
<a href="#12a">Return to article</a>

<a name="13">13</a> Fla. Stat. Ann.
§559.72 (2004). <a href="#13a">Return to article</a>

<a name="14">14</a> See Story v. J. M.
Fields Inc., 343 So. 2d 675, 676-77 (Fla. App. 1977) ("We do not
underestimate the difficulties presented by the deceptively simple
language of [the statute, but]...for good or ill, this legislation
largely commits to juries the double role of defining appropriate
standards and applying them on a case-by-case basis, after considering
not only the frequency of the calls but also the legitimacy of the
creditor's claim, the plausibility of the debtor's excuse, the
sensitivity or abrasiveness of the personalities and all other
circumstances that color the transaction."). <a href="#14a">Return to
article</a>

<a name="15">15</a> See Liggins v. May
Co., 373 N.E.2d 404, 405-06 (Ohio Ct. Common Pleas 1977). <a href="#15a">Return to article</a>

<a name="16">16</a> See Baird v. Norwest
Bank, 843 P.2d 327, 328 (Mont. 1992). <a href="#16a">Return to
article</a>

Journal Authors

Ari H. Gerstin

Elizabeth M. Bohn

Journal Date

Sunday, May 1, 2005 - 12:00