May/June 2001

Fair Debt Collection Practices:
Federal Guidelines for Third Party Collectors

by Glen R. McCluskey

"the FDCPA applies only to third-party collection activities"

The Federal Fair Debt Collection Practices Act (FDCPA) was passed by Congress in 1977 as a means of eliminating abusive debt collection practices by third-party debt collectors and to assure that collectors who refrain from unfair tactics are not competitively disadvantaged.1 The FDCPA is sweeping consumer-protection legislation. Since it is a federal statute, most cases are brought in federal courts. Thousands of cases exist based on FDCPA causes of action and more are generated every month.

The FDCPA is important to attorneys whose clients are debt collectors or who regularly collect on the debts of others. In some cases, credit grantors may also be liable under the FDCPA. An exemption in the FDCPA, which kept attorneys outside of its scope, was removed in 1986. Following that amendment, the U.S. Supreme Court in Jenkins v. Heintz affirmed a 7th Circuit decision holding that the FDCPA applies to attorneys who regularly engage in consumer debt collection activity, even when that activity consists of litigation.2 What percentage of a law practice constitutes "regularly engaging in consumer debt collection activity" is not completely clear. At least one case found that an attorney was a debt collector when only a miniscule portion of the firm's practice was devoted to collection.3 Other courts have found that devoting one-third to one-half or more of an attorney's practice to debt collection meets the threshold for an FDCPA claim against the attorney.4 In some cases, the percentage can be even less.

It must be made clear that the FDCPA applies only to third-party collection activities. The collection of one's own debts or attempts by an in-house attorney to collect debts for a creditor are exempt from FDCPA coverage in most cases. The statute excludes creditors unless they use a name other than their own, which would indicate that a third party is collecting the debts.5 This is because the FDCPA is aimed at abusive practices of third-party collectors, not similar practices by direct creditors. Consequently, an attorney who spends a large percentage of time trying to collect fees owed to her own law firm is a creditor and not a collector for purposes of the FDCPA. You should be aware that more than 20 states have laws more stringent than the FDCPA on this issue and bring creditors within the scope of the state's fair debt collection laws.

An especially onerous aspect of the FDCPA is that it is a strict liability statute. A plaintiff need not prove intent or fault. The FDCPA states, "(A)ny debt collector who fails to comply with any provision … is liable to such person in an amount equal to the sum of … such actual damages as the court may allow, but not exceeding $1,000." In addition, the court must award court costs and reasonable attorney's fees to a successful plaintiff. The court has discretion to determine the exact amounts.6 This part of the law is hotly debated. As a consumer statute, the FDCPA provides solid protections; however, consumers rarely, if ever suffer actual damages. This means that an individual who does not suffer actual damages will recover at most $1,000 per case.7 Attorney's fees however, are awarded in addition to the statutory damage amount. Courts generally use the "lodestar method" to determine the amount of attorney's fees to be awarded.8 Although reasonable fees will be allowed, many courts have freely reduced excessive requests for attorney's fees in FDCPA cases.9

GLEN R. MCCLUSKEY is legal counsel to the American Collectors Association, Inc., an international trade association of debt collection professionals, credit grantors, and attorneys. He is a cum laude graduate of William Mitchell College of Law and is licensed to practice in Minnesota, Wisconsin, and in Minnesota Federal District Court.

The usual procedural defenses such as lack of jurisdiction and failure to state a claim are available in an FDCPA suit. However, the primary substantive defenses to an action brought against a collector or attorney are the "bona fide error defense" and good faith conformity with an FTC advisory opinion.10

A debt collector may not be held liable in any action…if (it) shows by a preponderance of the evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.11

This provision gives some protections to collectors who inadvertently violate the act so long as they can show such a violation is a rare occurrence and that they have policies, business routines, and employee training in place to avoid this kind of problem. Such bona fide errors are generally clerical in nature. The courts are split on whether a successful bona fide error defense can be predicated on the collector's having acted on the erroneous advice of legal counsel. In Baker v. GC Services Corp. the collector had relied on the opinion of its attorney regarding the specific wording on its billing notices. The plaintiff sued based on confusion about the validation notice required.12 The court ruled that reliance on an attorney concerning mistakes of law was not a valid defense and that the bona fide error defense applied only to clerical errors.13 One the other hand, in Pollice v. Nat'l Tax Funding, the court expanded the defense holding that bona fide error may include errors in legal judgment.14Attorneys for collector-clients would be wise however, not to rely on Pollice, which is valid only in the 3rd Circuit. Courts around the country generally side with the Baker case.

Attorneys who are collectors or their collector-clients must be aware of the strict requirements of placing a "validation notice" on debt collection letters. This specific language puts the debtor on notice that they have up to 30 days to dispute the validity of a debt, otherwise the collector will presume the debt is valid. This language must be provided in writing within five days after the initial communication with the consumer. In practice, it is generally placed on the first dunning notice sent. However, if the first communication with the debtor is verbal, the notice must still be sent within five days of that communication.15 Attorneys should know that communications with debtors and letters they send to collect third-party debts must also adhere to this requirement. A vast amount of litigation has centered on this required language and how other parts of the letter may interact to contradict, "overshadow," or confuse the least sophisticated consumers about their rights.16 Subsequent notices must included the so-called "mini-Miranda" language to inform the debtor that the "communication is from a debt collector and any information obtained will be used for that purpose."17 This talismanic language is not strictly required however.18 The Federal Trade Commission (FTC) which enforces the FDCPA has ruled that the words "debt collector" on the dunning notice is enough to meet the subsequent notice requirement, but that the phrase "attorney at law" is not.19 Attorneys should provide more specific language to indicate their role as debt collectors. This "mini-Miranda" requirement does not apply to any formal legal pleading made in connection with a legal action.20 The statute does not define "formal legal pleading" which leaves this areas ambiguous. However, pre-litigation or post-litigation settlement letters clearly do not fall within the exception and the recommended language must be included.21

A complete discussion of the FDCPA and how it affects attorneys and their clients is well beyond the scope of this article. Attorneys should remember that strict requirements are in place that must be followed when attempting to collect on the debts of a client. Attorneys who fall within the definition of "debt collector" will themselves be subject to the rigors of the FDCPA.22 Familiarity with this statute and with even more stringent state law is essential for attorneys involved in debtor-creditor work.

1. 15 U.S.C.A. ¤ 1692(e) (1997).
2. Jenkins v. Heintz, 115 S. Ct. 1489 (1995).
3. Strojanovski v. Strobl & Manoogian, P.C., 783 F. Supp. 319, 322 (E.D. Mich. 1992).
4. Ditty v. Checkrite, Ltd., 973 F. Supp. 1320 (D. Utah 1997) (attorney liable under FDCPA where debt collection represented one-third to one-half of firm's activities); Fox v. Citicorp Services, 15 F.3d 1507 (9th ""Cir. 1994) (attorney liable under FDCPA where over 80% of firm activities involve debt collection).
5. 15 U.S.C.A. ¤ 1692(a)(6)(a) (1997).
6. 15 U.S.C.A. ¤ 1692k (1997).
7. Raimonda v. McAllister & Assocs., 50 F. Supp.2d 825 (N.D. Ill. 1999), Harper v. Better Business Bureau, 961 F.2d 1561 (11th Cir. 1992).
8. Norton v. Wilshire Credit Corp., 36 F. Supp.2d 216, 218 (D. N.J. 1999); Blanchard v. Bergeron, 109 S.Ct. 939, 945 (1989); Cruz v. Local Union No. 3 of IBEW, 34 F.3d 1148, 1159 (2nd Cir. 1994) (where a reasonable attorney fee is one calculated on the basis of rates and practices prevailing in the market and one that grant the successful plaintiff a "fully compensatory fee.")
9. Edwards v. Nat'l Bus. Factors, Inc., 897 F. Supp 458 (D. Nev. 1995); Altergott v. Modern Collection Techniques, Inc., 864 F. Supp.778 (N..D. Ill. 1994); Mares v. Credit Bureau of Raton, 801 F.2d 1197 (10th Cir. 1986).
10. 15 U.S.C.A. ¤ 1692k(e) (1997).
11. 15 U.S.C.A. ¤ 1692k(c) (1997).
12. See 15 U.S.C.A. ¤ 1692g (1997).
13. Baker v. G. C. Services Corp., 677 F.2d 775, 779 (9th Cir. 1982).
14. Pollice v. Nat'l Tax Funding, 225 F.3d 379 (3rd Cir. 2000).
15. 15 U.S.C.A. ¤ 1692g (1997).
16. Greer v. Shapiro & Kresman, 2001 WL 389343 (E.D. Pa. 2001)
17. 15 U.S.C.A. ¤ 1692e(11) (1997).
18. Emanauel v. American Credit Exchange, 870 F.2d 805 (2nd Cir. 1989).
19. Kramer, Informal Staff Letter, (November 13, 1996).
20. Id.
21. Tolentino v. Friedman, 46 F.3d 645 (7th Cir. 1995); Dutton v. Wolpoff & Abramson, 961 F. 2d 459 (4th Cir. 1992).
22. 15 U.S.C.A. ¤ 1692a(6) (1997); Jenkins, supra, 115 S. Ct. 1489.