The Consumer Financial Protection Bureau (CFPB) recently released its fifth Fair Debt Collection Practices Act (FDCPA) Annual Report. The study shows that the agency expects consumer debt to continue to grow, with increases in the student loan segment of the market driving the growth. The CFPB expects debt collection litigation to continue its growth trend as well. It says FDCPA litigation nationally has increased by 271 percent since 2007.
Wisconsin lawyers who do debt collection and FDCPA work probably will have plenty to keep them occupied in the near future. That can also mean continued growth in litigation and in the number of malpractice claims against lawyers doing these types of cases.
Wisconsin Lawyers Mutual Insurance Co. (WILMIC) claims attorney Matt Beier says, “In the last seven years, there has been a marked increase in claims made against our insured lawyers in the practice areas identified as ‘Bankruptcy/Collections’ and ‘FDCPA’. From 2009 through 2014, the rate of claims we received each year more than doubled from the yearly average from 1986 to 2009. Looking solely at FDCPA claims, an average of 1.5 claims per year were made from 1994 to 2009. That jumped to an average of 5.5 such claims made from 2010 to 2014.”
Those trends made bankruptcy and collections work the number one area of practice last year when it comes to frequency of claims filed against lawyers, representing almost one-quarter of all WILMIC’s claims in 2016.
History of FDCPA
Congress enacted the FDCPA in 1978. It was faced with “abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors.”1 The law established rules and guidelines for debt collectors to follow when collecting consumer debt – debt incurred for personal, family, or household purposes. Beier notes, “Application of and compliance with the FDCPA is likely the most litigated area of consumer collections law today. The FDCPA is a strict-liability statute that provides for the recovery of actual damages, statutory damages of $1,000 per action per individual, and reasonable attorney’s fees.” (See sidebar for the text of Wisconsin’s statute, part of the Wisconsin Consumer Act, regarding prohibited collections practices.)
What makes the FDCPA a subject of so much litigation? Beier says, “The language of the law invites litigation and there are countless examples of behavior that have been found to be prohibited by various courts. In addition, the statute lists several examples of such prohibited conduct.”
That conduct includes:
- harassing or annoying debtors;
- threatening debtors with arrest;
- using profanity;
- disclosing the debt to a third party;
- threatening legal action unless litigation actually is being contemplated;
- contacting a debtor directly if the debt collector knows the debtor is represented by counsel; and
- contacting debtors before 8 a.m. or after 9 p.m.
Beier cautions that when lawyers do debt collection work on behalf of a client, they should be aware of the many rules that govern the activity.
“In a debt collector’s first communication with the consumer, the debt collector must notify debtors about their ability to challenge the validity of a debt and to provide other basic information. This is often referred to as the ‘validation notice.’ In every subsequent communication with the debtor, the debt collector must advise the debtor that the communication is from a debt collector attempting to collect a debt and that information obtained will be used for that purpose. This is sometimes called the ‘Mini-Miranda’. The FDCPA even gives debtors the right to demand that the third-party debt collector terminate all further communications.”
In working with WILMIC-insured lawyers on FDCPA claims, Beier finds that some common mistakes often trip up lawyers who get involved in collections work. He has four main suggestions that may help avoid potential claims:
Don’t Dabble. The FDCPA is a highly technical, strict-liability statute, which means mistakes are easy to make, and there are very few defenses available. Beier says many lawyers start doing collections work but have very little experience in this area of the law. This so-called dabbling can lead to missteps.
Beier says if you start doing collections work, make sure you understand what you’re doing. “The statutory damages, actual damages, and the fee-shifting provisions are what make the FDCPA such a potent ‘double-whammy.’ The FDCPA is an extremely vague statute, which invites litigation and gives creative plaintiffs’ counsel options to pursue even the most technical violations, while requiring substantial effort and fees to defend. It does not help that the majority of claims are brought in federal courts with largely inconsistent interpretations of the law among district courts and across circuits.”
Over time, Beier says, the value of a claim under the FDCPA rises as the fees on both sides increase. In short, he says, “The exposure can become quite substantial as litigation ramps up. It is advisable to refer consumer collection matters to firms that use sound practices and have proper policies in place.”
If You Do Collections Work, Check Your Letters. Does a perfect form letter exist? Beier says, “No, but use them anyway! Identify the exact language from the statute that is required in your communication to the debtor and use it, verbatim. Unfortunately, courts don’t often help lawyers out by providing templates.”
However, Beier says that Judge Posner’s opinion in Bartlett v. Heibl2 offers a form letter for those seeking to collect certain consumer debts.
Be Careful About Making Demands. In Bloodworth v. United Credit Service Inc.,3, the debt collector’s letter included the following:
“FURTHER DELAY CANNOT BE TOLERATED. IF PAYMENT IS NOT RECEIVED IN THIS OFFICE WITHIN FIVE DAYS, WE WILL CONSIDER OTHER METHODS OF ENFORCING COLLECTION.”
Beier says, “The standard used by the court in examining this statement is that of a ‘least sophisticated debtor.’ Using this standard, the threat was found to be a threat of imminent action. The debtor survived a motion to dismiss because he also alleged that the debt collector had no intention of suing after the deadline expired.”
The lesson to be learned from Bloodworth, says Beier, is this: “Be certain you intend to take the action threatened in your letter. Or, just don’t make threats!”
“Meaningful Attorney Involvement” Is Required. The FDCPA forbids a debt collector from using “any false, deceptive, or misleading representation or means in connection with the collection of any debt,”4 including “the false representation or implication that any individual is an attorney or that any communication is from an attorney.”5
A lawyer who merely rents his or her letterhead to a collection agency violates the Act. Beier says, “In such a case the lawyer is allowing the collection agency to impersonate him. A lawyer who is a debt collector violates the FDCPA if he sends a collection letter that he has not reviewed, since his lawyer’s letterhead then falsely implies that he has reviewed the creditor’s claim.”
The Consumer Financial Protection Bureau, joined by the FTC, filed an amicus brief arguing that a lawyer engages in a deceptive debt-collection practice in violation of the FDCPA when he or she files a debt-collection lawsuit without meaningfully reviewing it first.6 Beier says that is not an uncommon practice.
“For some law firms, collection work is profitable because of sheer volume. They crank out collection notices but there isn’t much oversight from the lawyers. If the lawyer spent a lot of time reviewing each case before the collection notice went out, it would cut down on the profitability of the work. But little or no review clearly runs afoul of the FDCPA. That’s where lawyers can get themselves into trouble.”
There is a place for lawyers who want to do collections work. It can be done seamlessly and without issues, or it can become difficult and troublesome. The rise in the frequency of malpractice claims in this area certainly speaks to the potential pitfalls of such work.
It is important for lawyers to carefully review each case before taking it on. Evaluate the details of the creditor’s position and make sure to obtain all documents related to the financial obligation, including prior communications between the creditor and the debtor.
Finally, understand that the Consumer Protection Financial Bureau is likely not going away and is watching closely. The FDCPA must be taken very seriously. Know it, understand it, and comply with it. As Beier says, “The FDCPA is a very potent statute. It can also be extremely vague, which can invite litigation to pursue even the smallest, most technical violations.”
Wisconsin Statute Governing Collections
Although this column focuses on federal law, Wisconsin also has a statute regarding prohibited collections practices. Lawyers doing collections work should familiarize themselves with all relevant statutes and case law.
Wis. Stat. 427.104 Prohibited practices.
(1) In attempting to collect an alleged debt arising from a consumer credit transaction or other consumer transaction, including a transaction primarily for an agricultural purpose, where there is an agreement to defer payment, a debt collector may not:
(a) Use or threaten force or violence to cause physical harm to the customer or the customer’s dependents or property;
(b) Threaten criminal prosecution;
(c) Disclose or threaten to disclose information adversely affecting the customer’s reputation for credit worthiness with knowledge or reason to know that the information is false;
(d) Initiate or threaten to initiate communication with the customer’s employer prior to obtaining final judgment against the customer, except as permitted by statute including specifically [section] 422.404, but this paragraph does not prohibit a debt collector from communicating with the customer’s employer solely to verify employment status or earnings or where an employer has an established debt counseling service or procedure;
(e) Disclose or threaten to disclose to a person other than the customer or the customer’s spouse information affecting the customer’s reputation, whether or not for credit worthiness, with knowledge or reason to know that the other person does not have a legitimate business need for the information, but this paragraph does not prohibit the disclosure to another person of information permitted to be disclosed to that person by statute;
(f) Disclose or threaten to disclose information concerning the existence of a debt known to be reasonably disputed by the customer without disclosing the fact that the customer disputes the debt;
(g) Communicate with the customer or a person related to the customer with such frequency or at such unusual hours or in such a manner as can reasonably be expected to threaten or harass the customer;
(h) Engage in other conduct which can reasonably be expected to threaten or harass the customer or a person related to the customer;
(i) Use obscene or threatening language in communicating with the customer or a person related to the customer;
(j) Claim, or attempt or threaten to enforce a right with knowledge or reason to know that the right does not exist;
(k) Use a communication which simulates legal or judicial process or which gives the appearance of being authorized, issued or approved by a government, governmental agency or attorney−at−law when it is not;
(l) Threaten action against the customer unless like action is taken in regular course or is intended with respect to the particular debt; or
(m) Engage in conduct in violation of a rule adopted by the administrator after like conduct has been restrained or enjoined by a court in a civil action by the administrator against any person pursuant to the provisions on injunctions against false, misleading, deceptive or unconscionable agreements or conduct ([sections] 426.109 and 426.110).
1 15 U.S.C. §1692(a).
2 128 F.3d 497 (7th Cir. 1997).
5 15 U.S.C. §1692e(3).
6 Bock v. Pressler & Pressler LLP, 658 F. App’x 63 (3rd Cir. July 27, 2016) (unpublished).