An Industry Under Siege

By Sidney Stern, Stern Recovery Services, Inc.

2016 Alliance sponsor feature article by Stern Recovery Services, Inc.

Hyper-Technical Regulations Bothersome To Debt Collectors

I doubt debt collectors are popular with anyone except their own clients and persons who understand that trained personnel are often needed to secure past-due payments in a credit-driven economy. That, unfortunately, is not such a large number of persons. And since in America voters ultimately determine what laws are passed, it is hardly surprising that Federal and State debt collection laws are full of hyper-technical and in some cases nonsensical requirements the violation of which can result in fines enforced against debt collection companies.

Have you ever heard of a politician who ran for office on the basis of making debt collection laws fair to “all concerned”? Obviously, democratically-elected leaders pass laws preferred by the majority of voters, most of whom, human nature being what it is, dislike being reminded that their bills are past due.

This is not to suggest that laws regulating debt collection activity are unnecessary. The potential for abusive practices by our industry has always been present. The 1977 Federal Fair Debt Collection Practices Act (FDCPA, a/k/a 15 U.S. Code 1692 et seq), passed by Congress at the urging of President Jimmy Carter and modeled after North Carolina’s debt collection statutes, has done a great deal to restrain unfair practices by unscrupulous debt collectors and protect consumers.

Unfortunately, the FDPCA, in many of its provisions, is a vaguely-worded statute. Terms such as “unconscionable means,” “deceptive practices,” and “least sophisticated debtor” can be and have been distorted from their original, reasonable meanings by aggressive consumer-protection attorneys and the Federal Courts to create new requirements that seem, to me, to defy common sense.

What’s more, because the fines under the FDCPA are relatively inexpensive (about $2,000 per violation) and the cost of defense in Federal Court is very high ($25,000 at a minimum), our industry has tended to settle cases far more often than maybe we should have.
As a result, during the 35 years that Federal Courts have been interpreting and applying the FDCPA, the regulations, however reasonable originally, have become increasingly more detailed and, in some cases, impossible to comply with.

And, because virtually nobody, including the media, likes collectors, Congress has rarely passed legislation that would clarify the broadly-stated terms of the statute that allow the Courts such leeway.

The Foti Decision
(Foti v. NCO Financial Systems, Inc. 424 F. Supp. 2d 643 (2006)

In 2004 Paul J. Foti received a voice message from a collector at NCO Financial Systems regarding a $78.75 unpaid bill, setting set in motion a chain of events that resulted in the most confusing decision – from the point of view of the collection industry – ever rendered by the United States District Court for the Southern District of New York.

It is important to understand that the FDCPA [U.S.C. 1692 e (11)] requires that the statement “This is an attempt to collect a debt and any information obtained will be used for that purpose” be made in every communication, written or oral, with a debtor. This is what debt collectors refer to as the “Mini Miranda” warning.

It also important to understand that the FDCPA [U.S.C. 1692 c (b)] forbids disclosure of the existence of the debt to any person other than the debtor.

Here is an abridged version of the message the NCO collector left on Mr. Foti’s answering machine: “Good day, we are calling from NCO Financial Systems regarding a personal business matter that requires your immediate attention. Please call this number back.”

Harmless, enough, it would seem.

But, the U. S. District Court held that said message was a “communication” as defined by the FDCPA. And, that therefore the collector had violated the FDCPA by not including the Mini Miranda warning in the message.

Lawyers for NCO Financial Systems contended that leaving the Mini Miranda on the debtor’s telephone message machine might well have violated the FDCPA’s provision against disclosing the debt to anyone except the debtor, as other persons may have had access to the debtor’s message machine. In other words, the NCO lawyers advised the Court that their client (and this is paraphrasing) “would be darned if it did NOT leave the Mini Miranda warning and be darned if it DID leave the Mini Miranda warning.”

The Court, in effect, said “too bad for you, NCO” and, by extension, the entire collection industry.

The Court held that “just because a collector is permitted. to collect a debt does not entitle the collector to use any means (such as a message on an answering machine), even if those means are the most economical and efficient.”

Three years later, another Federal Court expressed the same idea with a particularly inapt and irritating analogy to the Vietnam War (of all things!): “Just as it is not reasonable to destroy a village in order to save it, neither is it reasonable to violate at Act (the FDCPA) in order to comply with it.” (Edwards v. Niagara Credit Solutions, Inc. 584 F. 3d 1350, 11th Circuit 2009)

As a result of double-edged, unavoidable legal exposure created by Foti and subsequent cases, most collection agencies no longer leave messages of any sort on debtor’s answering machines. If the debtor does not answer, collectors are instructed merely to hang up.

Congress is now considering a bill (H.R. 4101) that would amend the FDCPA to allow debt collectors to leave telephone messages despite the Foti decision. That bill was referred to Committee on February 28, 2012. GovTracks.com estimates the chance of enactment at 2%.

The “Least Sophisticated Debtor” and the “Overshadowing Rule”

Anyone with experience in collections, banking or business in general knows that not all debtors are disadvantaged intellectually, culturally, economically or WHATEVER IT WAS that Congress meant when it inserted the phrase “least sophisticated debtor” into the FDCPA. Many debtors, as we all know, are clever and manipulative. Many understand the English language with precision and can skillfully evaluate the meaning of written or oral communications.

Nonetheless, in a series of decisions, the Federal Courts, as they have reviewed collection letters consumer attorneys have brought before them, have arrived at general rule which I paraphrase as follows: “Any language that could confuse the most intellectually-challenged consumer who can possibly be imagined violates the FDCPA.”

The issue arises in connection with the debtor’s understanding of his/her right to request an itemized statement within 30 days of receipt of the collection letter. Every collection letter must advise every debtor of this right [U.S.C. 1692 g].

That seems fair enough.

But, then, in 1997, a Federal Court (Chauncey v. JDR Recovery, 118 F. 3d 516, 7th Cir.) held that a demand for “immediate” or “urgent” payment might tend to OVERSHADOW the understanding of the “least sophisticated consumer” as to his or her right to request an itemized statement within 30 days. The Court stated that the “least sophisticated consumer” could become so worried by a request for immediate payment that he or she would disregard his or her right to an itemized statement within 30 days.

So, JDR Recovery, which had included a request for “immediate payment” in its demand letter, was fined, and far worse, was required to pay not only its own legal fees but those of the victorious consumer Plaintiff, which may have totaled hundreds of thousands of dollars. All because of a Federal Court’s “new” interpretation of the wording of its demand letter!

Subsequent cases in various Federal Courts since 1997 have upheld and applied this rule, which effectively prohibits collection agencies from requesting “immediate payment” in their demand letters.

The story now becomes a bit personal and is instructive, I believe, insofar as it demonstrates how FDCPA’s restrictive power can be expanded by the mere threat of Federal Court action far beyond what may have been originally intended by Congress.

Like most collection agencies, Stern & Associates was aware of the 1997 “Overshadowing Rule” as applied in Chauncey and other cases. Our demand letters avoided the (time-honored, but now illegal) request for “immediate payment.” But, near the middle of the page and in normal sized font, we stated: “Call our office immediately.”

About two years ago, a patient took one of our letters to a consumer-rights attorney in Sanford who filed suit against us in the United States District Court on grounds that our letter had violated the “Overshadowing Rule.” The filing of the lawsuit was not preceded by a phone call or letter asking for settlement. The attorney simply went to the Federal Courthouse in Durham and filed.

Reviewing the lawsuit, I confidently told our staff that we were “OK” because our letter had not asked for “immediate payment.” As is often the case, I was wrong.

My attorney advised me that yes, we might prevail on the issue as to whether or not the request to “call our office immediately” might confuse the “least sophisticated debtor” as to his or her right to request an itemized statement within 30 days. He went on to point out that it would not be possible to predict how the United States District Court in Durham would view the matter. And that the Court might well take it upon itself to expand the prohibition against requests for “immediate payment” to a prohibition against requests for an “immediate call,” as, frankly, no one knows what might or might not confuse the “least sophisticated consumer.” (Incidentally, the patient in our case was sufficiently sophisticated to see that it was to her advantage to consult a consumer rights attorney as opposed to paying her bill.)

My attorney advised me that defending the case in Federal Court in Durham might cost upwards of $30,000 and much more than that were appeals to higher courts necessary. And, worse, were the patient to prevail, we would have to pay her legal fees, which would likely be inflated. So, worst case, I was looking at more than $100,000 in legal fees.

Our actual FDCPA “violation” (if it WAS a violation) called for a $2,000 fine. Needless to say, I wrote a check in the vicinity of that amount to the patient whose attorney then dismissed the lawsuit. I also deleted the word “immediately” from our standard demand letter’s request that the debtor call our office.

(And, as is universally the case in these matters, the patient, who had never disputed the underlying validity of her bill, never paid the $344.97 she owed the provider.)

“Unconscionable Means” and “Collection Fees”

Clients usually pay their collection agencies by means of a contingency fee, i.e. the collection agency is allowed to keep a percentage of what it recovers as its fee. Historically, some clients have attempted to pre-compensate themselves for some of the costs they incur with collection agencies by adding a percentage of the bill (15%, usually) as a “collection fee” before placing the bill with a collection agency.

The extra collection fee would not have been added on a whim. Rather, the patient application would clearly state that a specified “collection fee” would be added to the bill were it not paid within a specified time frame. This language would appear above the patient’s signature line. By signing the patient application, the patient would indicate his or her consent to the extra “collection fee” under the stated circumstances.

As background, the “Unconscionable Means” section of North Carolina’s debt collection law [G.S. 75-55 (2)] directs that debt collectors may not attempt to collect extra fees added to bills as “collection fees” UNLESS there is a “legal entitlement.”

To my mind, a “legal entitlement” is indisputably created when a patient, who has voluntarily signed a patient application as described above, fails to pay within the specified time limits. And that, therefore, under those circumstances, North Carolina’s “Unconscionable Means” statute PERMITS collection agencies to attempt to recover “collection fees,” as well as the underlying unpaid balances.

This is NOT the opinion of the North Carolina Attorney General whose office has forbidden collection agencies to attempt to recover extra “collection fees’ under any circumstances.
The egregiousness of this misreading of North Carolina law prompted the North Carolina Collectors Association, under the leadership of NCHFMA member Danny Nichols, to TWICE request the Attorney General’s Office to review its ruling. And twice the Attorney General’s office has refused to reverse its ruling, which of course is popular with everyone in North Carolina except medical providers and debt collectors. To my knowledge, the Attorney General’s Office has refused to explain the reasoning that led to its conclusion.

A “Wild Stab” at a Big “Payday”

All U.S. citizens have the right to file lawsuits – any kind of lawsuits – in State or Federal Courts.

In January of 2012, a Greensboro resident by the name of “Mattie” (not her real name) sued our office at the United States District Court here in Greensboro (where the John Edwards trial was held a few months later). The lawsuit concerned her unpaid balance of $88.00 to our client, and, as far as we could tell, our handling of that debt.

Mattie included no specific allegations in her Complaint. Rather, representing herself without a lawyer, she transcribed long sections of the FDCPA and demanded $36,000 in fines and $86,000 in “punitive damages,” all totaling $126,000. In other words, Mattie did not explain WHY she was entitled to damages. She merely stated the AMOUNT of the damages to which she felt she was entitled.

Despite the apparent nonsensical nature of Mattie’s pleadings, we of course had no choice but to defend “the case.” And, since there was a great deal of money at stake, our defense needed to be thorough, no matter how frivolous Mattie’s lawsuit might have seemed from the Complaint she had filed.

My attorney advised me to contact Mattie and settle out of court. “Settle what?” I responded. For once, I disregarded his advice.

My attorney and I spent a good deal of time organizing documents and records of all sorts in anticipation of the initial hearing in Federal Court. Because Mattie was representing herself and might therefore come up with barely predictable, if legally unsound, allegations, we needed to be very prepared before appearing before of the U.S. Magistrate.

My Compliance Officer, Jennifer, and I arrived at the Federal Courtroom about 45 minutes early, well before our attorney arrived. Unlike our State Court in Guilford County whose modest architecture and low-key mix of petty criminals, small-time litigants and real estate attorneys creates a comparatively relaxed atmosphere, our Federal Courthouse presents a formal and intimidating environment. The hallways are absolutely quiet, the granite floors are polished and tall columns line the interior of the building, projecting Federal authority and even severity on all who enter. I must admit that, even as an attorney, I was nervous. Jennifer, a non-lawyer, was really nervous.

As we waited, Jennifer reviewed Mattie’s credit report which listed 20 or so unpaid medical bills. Jennifer also noticed several unpaid fines and court costs owed to the State of North Carolina in connection with criminal violations for which Mattie had been convicted.
Then, Jen, with her feminine intuition, said: “Look, Sid, as nervous as the Federal Courthouse is making us, think how it will affect Mattie. She is a convict. Convicts know what it is like to be taken out of the “back door” of the Courtroom in handcuffs. Mattie will be absolutely terrified of this place. I don’t she will show up.”

Jennifer was correct: The Court session began, our “case” was called and Mattie failed to appear. Nonetheless, because the Rules of Federal Procedure are so formal, various notices had to be mailed to Mattie over the next weeks before her “case” could be thrown out.

That was the end of the “Mattie” case, except for the legal fees we had paid our attorney for his preparations for the Plaintiff who never showed up.

Improved Version of Article, 19 Dec 2012

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