Debt collection has a cost. Each year, creditors spend billions of dollars engaging collection agencies to collect delinquent debts. In an effort to mitigate these expenses, creditors have increasingly taken to modifying consumer contract language to allow for the recoupment of collection fees. However, the decision to attempt to recoup collection fees carries with it a corresponding obligation to comply with the myriad of federal, state and local laws and regulations. Collection agencies that assist their clients in developing contractual language that avoids potential legal and regulatory pitfalls will be able to add value by recovering their clients’ costs of collection while minimizing the risk of litigation and regulatory scrutiny.
At the federal level, charging collection fees is addressed by the Fair Debt Collection Practices Act in Section 808(1), which reads: “A debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section: (1) the collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.” In its Official Staff Commentary, the Federal Trade Commission has opined a debt collector may attempt to collect a fee or charge in addition to the debt if one of the two circumstances detailed below exist.
- The charge is expressly provided for in the contract creating the debt and the charge is not prohibited by state law; OR
- The contract is silent but the charge is otherwise expressly permitted by state law.
Conversely, it is the position of the FTC that debt collectors may not collect an additional amount if either:
- State law expressly prohibits collection of the amount; OR
- The contract does not provide for collection of the amount and state law is silent.
To date, 41 states have passed laws addressing the permissibility of adding fees to debts. Many of these statutes permit the imposition of collection fees with various limitations. Intimate knowledge of these statutes is essential when making a determination of the permissibility of collection fees in any given jurisdiction.
It has been our experience that clients of all sizes rely heavily on the expertise of their collection agency partners in all operational and compliance matters relating to debt collection. Agencies that take the time to develop an expertise in the legal requirements and make the effort to work with their clients to identify potential contractual issues at the front-end of the collection fees process will recognize value in risk mitigation and increased client rapport. This dialogue should be made between legal departments and careful considerations should be taken to avoid ethical concerns relating to the improper practice of law.
Stay tuned for Part 2 on common pitfalls of collection fees.