In 2004 Congress extended new protections to taxpayers when it enacted a new law that allows the Internal Revenue Service to hire private debt collection agencies to collect federal tax debts from financially distressed families.n63 The new law provides that "[t]he provisions of the Fair Debt Collection Practices Act shall apply to any qualified tax collection contract."n64 The FDCPA does not apply, however, to the extent superseded by (1) the FDCPA-like prohibitions already in the tax code, (2) tax code restrictions on contact with third parties, and (3) "any other provision" of the tax code.n65 In other words, private tax collectors must comply with the FDCPA except where the tax code specifies conflicting duties.
As part of this new law, Congress specifically created a private cause of action against a debt collector who recklessly, intentionally, or negligently disregards any provision of the tax code or any regulation under it.n66 The taxpayer has the right to bring suit in federal court for "actual, direct economic damages," with a cap of $1,000,000 ($100,000 in the case of negligence), plus costs.n67 Unlike suits where the misdeeds are committed by IRS employees, the plaintiff need not exhaust administrative remedies. However, the new law insulates the IRS from any misconduct by the private collection, permitting suit to be brought against the private tax collector only, not against the United States.n68
It is also clear that private collectors are liable for common law torts committed in the course of collecting tax debts. The new law explicitly provides that the civil remedy it creates "shall not be an exclusive remedy."n69 It also appears that the taxpayer should be able to assert a claim under the FDCPA against the collector. While the new law says that the FDCPA shall apply to the contract, the legislative history shows that Congress meant by this language that provisions of the FDCPA "apply to the private debt collection company."n70 It is reasonable to interpret the new law as applying the FDCPA in full, including its private cause of action, to private tax collectors. The enactment of this language also suggests that Congress disagrees with the courts that have construed the term "debt" in the FDCPA narrowly as not to applying to tax debts.n71 The IRS expects to have private debt collectors collecting account in early 2007.
 Persons Specifically Excluded From the Term "Debt Collector."
Because "debt collector" is the principal triggering term for all but one n72 of the FDCPA's requirements, the ten exclusions from the term shield exempted individuals from most provisions of the Act.
[a] Creditors' Employees Collecting in the Name of the Creditor Are Specifically Excluded
This sectionn73 excludes from most FDCPA requirements a creditor's in-house collectors who use the creditor's true business name.n74 Creditors lose their exemption if they use a false name that indicates a separate debt collector is involved.n75 Even if they used the creditor's true business name, however, they may be covered if their collection contacts were designed to make the debtor believe that an independent collector had intervened.n76 By implication, creditor corporations collecting their own debts in their own name are also excluded because they can only act through their employees and officers. While a creditor may be responsible for its collection agencies' violations of state law, the weight of authority is that the FDCPA does not impose vicarious liability on FDCPA exempt creditors for their collection agencies' FDCPA violations.n77
[b] A Commonly Owned or Affiliated Corporate Collector Collecting Only for Its Affiliates Is Specifically Excluded if It Is Not Principally a Debt Collector
This exceptionn78 applies to debts transferred from one corporate affiliate or commonly owned organization to another, so long as the transferee is not principally a debt collector and collects transferred debts only for corporate affiliates.n79 One finance company branch, for example, may transfer a debt to a corporate affiliate in another city or state because the consumer owing the debt has moved, without falling outside this exclusion.
This section does not exclude from coverage unaffiliated companies transferring debts n80 or companies whose principal business is debt collection, regardless of their affiliation with the transferring entities. Nor does the exclusion apply where the transferee failed to disclose its relationship to the original creditor, leading the consumer to believe that a third party was now pursuing collection of the debt.
[c] State and Federal Officials Performing Their Duties Are Specifically Excluded
The exclusionn81 applies only to local government, state,n82 or federal employees and only if their attempts to collect particular debts are within their official duties. It does not apply to a private collection agency hired to collect debts for a state or federal agency.n83
A collection agency running a criminal bad check diversion program was denied its motion for summary judgment claiming exemption.n84
[d] Process Servers Are Specifically Excluded
This exclusionn85 applies, for example, to a sheriff serving a subpoena upon a witness to appear in an action for debt. It only applies while the process server is actually serving process in connection with a suit on a debt.
[e] Bona Fide Nonprofit Consumer Credit Counselors Are Specifically Excluded
Most cities have nonprofit counseling services or adjustment bureaus established and maintained by major credit extenders. These organizations commonly accept referrals of financially distressed consumers and help consumers arrange out-of-court plans to pay their creditors in an orderly fashion. To qualify for the exclusion, the counseling agency must be nonprofit, must engage in such service in good faith, and must receive and distribute payments, as well as provide financial counseling.n86
[f] Persons Collecting Debts as Part of Bona Fide Fiduciary or Escrow Arrangements Are Specifically Excluded
This sectionn87 excludes the above-named activities when practiced by bank trust departments, escrow companies, and other bona fide fiduciaries. Two decisions held a student loan guarantee agency was exempt under this provision because of the federal requirements for the agency's handling of reserve funds in a fiduciary manner.n88 In the Fourth Circuit, foreclosure attorneys argued that, because they were the substitute trustee of the deed of trust,n89 they were exempt as a fiduciary under 15 U.S.C. § 1692a(6)(F)(i). The court held that the defendant did not fall within the FDCPA fiduciary exemption since "actions to foreclose on a property pursuant to a deed of trust are not 'incidental' to its fiduciary obligation. Rather, they are central to it."n90
[g] An Extender of Credit Collecting on Behalf of Another a Debt It Originally Extended Is Specifically Excluded
This section n91 excludes from the general coverage of the Act a credit extender's collection (in its own name) of a debt that it originally extended and then sold or assigned to another creditor while remaining responsible for some or all aspects of collection.
[h] Persons Collecting Debts Not in Default When Obtained Are Specifically Excludedn92
The Senate report emphasized the application of this section to "mortgage service companies and others who service outstanding debts for others, so long as the debts were not in default when taken for servicing. ..."n93 This exempts servicers of mortgages,n94 student loans,n95 rental agreements,n96 utility bills,n97 medical debts,n98 and other consumer transactionsn99 if they obtained the debt before default.
This exemption was not available to a check authorization/guarantee service which was owed the debt only as the result of the payee merchant assigning the debt already in default pursuant to a contract for check authorization/warranty services.n100
[i] The Enforcer of a Security Interest in an Account Used as Collateral for a Commercial Loan Is Specifically Excluded
Retailers and lenders sometimes use consumer accounts receivable as collateral for their own commercial financing. Upon default by the retailer or lender, the secured party may collect the payments due on the retailer's or lender's consumer accounts receivable. In such situations, the secured party may not be considered a debt collector by virtue of this section.n101
[j] Check Collection Companies Disguised as District Attorneys
In 2006 Congress amended the FDCPA, legalizing in some circumstances district attorneys' profitable contracts with check collection agencies that operate invisibly in the name of the local district attorney.n102 So-called check diversion collection agencies, such as American Corrective Counseling Services,n103 are a new type of collection firm that collect dishonored checks for merchants in the name of the local district attorney by scaring consumers with the threat of criminal prosecution and jail time. This method of operation violates the FDCPAn104 unless the company is operating within the terms of the 2006 amendment. Typically these firms tell consumers that they can avoid prosecution if the consumers pay them very high fees to enroll in a financial responsibility class. The fees may exceed a small check by more than $150.
This shady business is likely to move into more neighborhoods, subjecting financially strapped families to threats of criminal prosecution and jail plus an additional very high collection fee if they cannot cover promptly a dishonored check.
The FDCPA exemption for check collections would not apply unless:
The district attorney's office establishes the collection program and supervises and controls the check collection agency;
The collection agency complies with the state penal laws and its contract with the district attorney;
The collection agency does not exercise prosecutorial discretion;
The district attorney determines that probable cause exists for a bad check prosecution;
The check writer has failed to pay the check after demand for payment of the amount of the check;
The district attorney makes a second determination of probable cause if the consumer disputes liability for the check based on identity theft, forgery or fraud;
The collection agency does not impose fees greater than authorized by the district attorney.
Furthermore, the exemption would not apply to checks where:
The check was postdated in connection with a payday or similar loan;
There was a stop payment order issued in good faith and with reasonable cause;
The check was dishonored because of an adjustment by the bank of the account on which it was drawn without notice to the issuer of the check;
The check was for partial payment of a preexisting debt where partial payment had been accepted;
The check writer was incompetent or not of legal age; or
The check was to pay for an illegal transaction.
Where the check collection company falls outside the exemption, they will be subject to the FDCPA and are likely to be in violation because of the way they operate in the name of the district attorney and often charge fees in excess of those permitted by state law. Some consumers have pursued a civil rights claim in cases involving these companies.n105
 Transactions Covered by the Act
[a] The Act Covers Only Debts Allegedly Owed by a Natural Person
Artificial entities, such as corporations, cannot be consumers.n106 The Act does not limit its protections to residents or citizens of the United States.
[b] Consumer Debts, Not Commercial, Are Covered
This definitionn107 limits the Act to coverage of the collection of consumer debts--those for personal, family, or household purposes; commercial debts are not within the definition.n108 The term "debt" includes consumer installment credit, such as small loans and retail installment sales, and other types of credit. The use of the loan proceeds is determinative of whether the loan is a "debt" within the coverage of the Act.n109 If the purpose for which the goods or services were acquired changes, the original purpose is determinative.n110 A court found that the FDCPA did not apply where an employee had received benefits under an employee benefit plan that may give rise to a reimbursement obligation but did not respond to the plan's inquiries about reimbursement, so that the insurer was forced to sue.n111
The decisions generally construe the term broadly enough to include dishonored checks,n112 rent,n113 medical bills,n114 utility bills,n115 insurance bills and claims,n116 student loans,n117 campground memberships,n118 credit cards,n119 condominium fees,n120 and judgments. The weight of authority excludes the following transactions from the term "debt": taxes; child support; shoplifting civil claims; fines; car accidents; and torts.n121
The term "primarily for personal, family, or household use" was borrowed from the Truth in Lending Act ("TILA").n122 It was intended to exclude transactions primarily for business purposes.n123
[ii] Coverage of Noncontractual Obligations Questioned
It seems reasonable to construe the term "debt" to include tax and other noncontractual obligations (such as tort claims) that are incurred by individuals and not in connection with conducting business. Some courts, however, have taken a different view, finding for example that tax assessments were not covered "debts,"n124 that child support payments assigned to the state were not "debts,"n125 and that a bank's efforts to recover an over-credited deposit amount is not a "debt."n126 A federal law passed in 2004 applies FDCPA protections to collection agencies collecting federal tax debts for the IRS.n127 On the other hand, the Seventh Circuit has interpreted the statute broadly, noting that there is no exception in the FDCPA even for consumers who may have fraudulently written a bad check, and it would not create one.n128
Given the possibilities for broad or narrow construction of the word "transaction," and, hence, the term "debt," the proper question is what best serves the congressional purpose for the FDCPA. It is clear that the primary function of the term "debt" was to exclude business transactions. The purposes of the FDCPA are remedial: to eliminate collection abuses, redress injuries inadequately protected by prior law, and encourage fair debt collection methods.n129
 FDCPA Protection of Persons Other Than Consumers
The FDCPA protects consumers--persons obligated or allegedly obligated to pay any debt--from violations of the Act. In addition, the private remedies provided by the Act are available to "any person."n130 Many of the protections afforded to "any person" are not limited by the terms "consumer" and "debt,"n131 but apply to employers, creditors, relatives, friends, and neighbors affected by violations connected with consumer transactions. Including nonconsumers within the coverage of the FDCPA furthers its purpose of eliminating abusive debt collection practices.n132
Actual damages are not required for standing under the FDCPA as the attempt to recover unlawful fees was made actionable by Congress without a requirement of actual damages to recover statutory damages.n133 The FDCPA applies whether or not the plaintiff owes the subject debt or any other debt or obligation.n134 The focus of the FDCPA is on the conduct of the debt collector, not on the conduct of the consumer.n135
The FDCPA was broadly written to cover all direct or indirect actions and attempts to collect consumer debt.n136 For example, the debt collector may be held liable for statements made to the consumer's attorney.n137 Sending false information about a delinquent payment to a credit reporting agency is debt collection conduct.n138 The FDCPA may apply to a debt collector's response to a consumer's inquiry.n139 Activities of a debt collector that are totally unrelated to collecting debts are not covered by the FDCPA.
[a] "Communications" Covered by the FDCPA
The term "communication" means the conveying of information regarding a debt directly or indirectly to any person through any medium.n140
A broader interpretation of the term "communication" is required to give all provisions of the FDCPA effect. As long as the collector is directly or indirectly attempting to collect a debt, any interchange of information to accomplish the collection of that debt must be construed as a "communication." No other construction is consistent with the purposes of the other provisions of FDCPA. The FTC advises that a summons and complaint that refer to the debt is a communication covered by the Act.n141 However, there is a recent split of appellate decisions on this issue, neither of which cited the current FTC position.n142
[b] Litigation Activities Covered by the FDCPA
Litigation activities by debt collectors are covered by the FDCPA.n143 A split on this issue by the Seventh and Eleventh Circuits may create some uncertainty. The Seventh Circuit in Thomas v. Law Firm of Simpson & Cybak n144 held that the 15 U.S.C. § 1692g(a) obligation to send the consumer a validation notice was triggered by the collection lawyer filing a summons and complaint against the consumer when the summons and complaint was the initial communication with the consumer. The split 6-4 decision disagrees with the Eleventh Circuit's contrary decision in Vega v. McKay.n145
The FDCPA provides consumers with an informal way to dispute a debt or find out who the original creditor was. The FDCPA debt validation provision requires the debt collector to give the consumer notice of this right in the "initial communication" or separately within five days of that communication. The collection firm argued that the broad definition of the term "communication" in the FDCPA should be narrowly construed to not include a summons and complaint. The Seventh Circuit followed the plain language of the FDCPA and kept an enormous loophole from developing in that Circuit. While there is some disagreement, a violation of the FDCPA may occur in a letter to the attorney representing a consumer.n146
Legal Topics: For related research and practice materials, see the following legal topics:
(n1)Footnote 1. 15 U.S.C. § 1692a(6). See Heintz v. Jenkins, 514 U.S. 291, 115 S. Ct. 1489, 131 L. Ed. 2d 395 (1995) .
(n2)Footnote 2. 15 U.S.C. § 1692a(3), (4), (5).
(n3)Footnote 3. Schlosser v. Fairbanks Capital Corp., 323 F.3d 534, 536 (7th Cir. 2003) .
(n4)Footnote 4. 15 U.S.C. § 1692a(6) (Supp. II 1979). See also Scally v. Hilco Receivables, L.L.C., 2005 U.S. Dist. LEXIS 13122 (N.D. Ill. June 23, 2005) (debt buyer would qualify as debt collector had it acted through retained counsel).
(n5)Footnote 5. See Ditty v. CheckRite, Ltd., 973 F. Supp. 1320 (D. Utah 1997) . See also Kimber v. Federal Fin. Corp., 668 F. Supp. 1480 (M.D. Ala. 1987) .
(n6)Footnote 6. 15 U.S.C. § 1692a(6). See, e.g., Oppong v. First Union Mortg. Corp., 407 F. Supp. 2d 658 (E.D. Pa. 2005) (Wells Fargo was debt collector under "regularity" prong of FDCPA, where it obtained 356 defaulted mortgages in course of its business of acquiring over 550,000 mortgages in year; court reasoned that it was frequency with which mortgage servicer collected defaulted mortgages that was determinative).
(n7)Footnote 7. Crossley v. Lieberman, 868 F.2d 566 (3d Cir. 1989) (attorney routinely collecting consumer debts was a debt collector). See Durkin v. Equifax Check Servs., Inc., 2002 U.S. Dist. LEXIS 20742 (N.D. Ill. Oct. 28, 2002) (defendant check authorization/guarantee service regularly engaged in the business of collecting debts where it collected over a million checks per year, although that number constituted less than 1% of the checks processed, because the initial focus of "regularity of debt collection depends on sheer volume," standard met here.); Campion v. Credit Bureau Servs., Inc., 2000 U.S. Dist. LEXIS 20233 (E.D. Wash. Sept. 19, 2000) (corporate debt collector was liable for the misconduct of its attorney and its employees). See also Russell v. Standard Fed. Bank, 2002 U.S. Dist. LEXIS 12334 (E.D. Mich. June 19, 2002) (FDCPA claim dismissed where plaintiff failed to provide the court with sufficient information as to whether defendant law firm collected debts regularly or how it violated the Act.). See Berndt v. Fairfield Resorts, Inc., 337 F. Supp. 2d 1120 (W.D. Wis. 2004) (timeshare resort management association was a debt collector because it regularly collected debts by sending 4700 payment notices a year, some on delinquent accounts, for amounts owed to a homeowner's association, even though the letters amounted to less than one percent of its management activities). See Wesley v. Calvary Inv., L.L.C., 2006 U.S. Dist. LEXIS 27391 (E.D. Pa. May 9, 2006) (data furnisher/debt collector may be subject to both FCRA and FDCPA). See also Roybal v. Equifax, 2006 U.S. Dist. LEXIS 22380 (E.D. Cal. Apr. 14, 2006) (credit reporting agency did not collect debts either directly or indirectly on behalf of themselves or others).
(n8)Footnote 8. See Ransom v. Telecredit Serv. Corp., 1992 U.S. Dist. LEXIS 22738, at 13 (D. Md. Feb. 5, 1992) (exception to the creditor exclusion in § 1692a(4), which applies to "any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another," applied to a computerized check authorization service that regularly attempted to collect on dishonored checks purchased from its subscribers because the debts were in default when purchased and debts originally belonged to another.). See also Kimber v. Federal Fin. Corp., 668 F. Supp. 1480, 1485 (M.D. Ala. 1987) ; Winterstein v. Crosscheck, Inc., 149 F. Supp. 2d 466 (N.D. Ill. 2001) (court rejected check guarantee service's arguments that it was not a debt collector).