We discussed that debt collection has a cost in Part 1 of this series. Now, let’s talk about the common pitfalls of collection fees.
Collection fee activity is a source of litigation and can be fodder for class action lawsuits. A review of existing case law helps identify potential pitfalls. Below are a few root causes of litigation in this arena:
1. Charging a percentage-based fee not specified in the underlying contract. Some contract provisions provide for the recovery of “costs of collection” without an itemization of costs. The courts have tended to take an unfavorable view of this approach. In Bradley v. Franklin Collection Services, Inc., the 11th Circuit Court of Appeals held that a patient registration form in which a consumer agreed to pay “all costs of collection” did not permit a percentage-based fee that did not correlate to the actual cost of collection. As the defendant failed to show that the percentage based fee, that was assessed prior to the collection activity, had a bearing on the defendant’s actual cost of collection, the court found a violation existed under FDCPA 808(1). Fortunately, the court stated that a percentage-based fee can be appropriate provided it is agreed upon by the contracting parties. The Seventh Circuit Court of Appeals in Seeger v. AFNI, Inc., took a similar approach and went so far as to suggest language which may authorize the imposition of a percentage-based collection fee.
2. Charging an amount expressly prohibited under state law. Managing the Rubik’s Cube of federal and state law relating to collection fee activity can be challenging and occasionally mistakes of law are made. In Patzka v. Viterbo College, the court found the creditor and collection agency violated the FDCPA and Wisconsin state law by charging a percentage-based collection fee that was expressly forbidden by Wisconsin law. The limitations of state law should be taken into consideration when drafting language. To ensure the enforceability of the provision, it should be clear that in no event should the fee exceed the amount permitted under applicable law.
3. Not including language in the underlying contract identifying when the collection fee becomes due and owing. This is a hyper-technical issue that consumer attorneys have raised with some success. The typical argument is that the fee charged by the collection agency to the creditor is contingency-based and thus not incurred by the creditor until the time collection is made. If contract language refers to the recovery of fees or costs without a timing element as to when the fee becomes due and owing, the argument can be made that the consumer has no obligation to pay the fee until payment is made on the debt, as that is the point in time the collection fee is actually incurred by the creditor. Such a theory contemplates two separate collections, a collection of the original balance and then a collection of the collection fee after a payment is made. In Gathuru v. Credit Control Services, Inc., the contracting parties signed an agreement requiring the consumer to pay collection costs “should they become necessary.” The collection agency sent the consumer an initial notice stating an amount due inclusive of collection fees. In finding a violation under FDCPA Section 807(2)(A), the court stated that the collection notice was a false misrepresentation because, as of the time of the notice, collection fees were “not yet recoverable and could not have been collected by the creditor.” In practice, this issue can be avoided by specifying when the fee becomes due and owing in the underlying contract. A provision that clearly states that the fee becomes due and owing upon placement of the account with a collection agency should serve to mitigate risk of litigation on this issue.
Collection fee litigation can be unavoidable in some circumstances as some consumer attorneys have a proclivity for filing lawsuits or sending demand letters without reviewing the underlying contract creating the debt or other pertinent information. However, contractual language and collection strategies that take into account applicable law and emerging case law will assist collection agencies in quickly disposing of frivolous litigation.