The Federal Trade Commission’s announcement on January 30, 2012, of its settlement with one of the nation’s largest debt buyers could provide more ammunition for attacks on collection actions initiated by debt collectors and debt buyers. The settlement underscores the need for an external audit of data, documentation standards, and collection procedures as to existing portfolios, as well as the need for appropriate due diligence prior to portfolio acquisition.
Ballard Spahr has created a Collection Documentation Task Force to assist clients in dealing with such concerns.
Among the allegations in the FTC’s nine-count complaint filed against Asset Acceptance, LLC, in a Florida federal court was the claim that Asset was aware that certain debt portfolios it purchased contained a significant amount of unreliable account data. Examples cited by the FTC included portfolios containing inaccurate Social Security numbers or other faulty data resulting in the mistaken identification of debtors, and portfolios with a pattern of consumer disputes indicating potential problems with the original creditor’s business practices and the validity of the underlying credit agreements.
The FTC alleged that, under such circumstances, it was not reasonable for Asset to rely solely on the creditor’s contractual representations and warranties about the account data’s accuracy.
As to debts for which Asset’s data was unreliable, the FTC charged that Asset’s representations to consumers that the debts were valid and the consumers were obligated to pay such debts were “in truth and in fact” false or misleading, or Asset did not have a reasonable basis for the representations at the time they were made. Accordingly, the FTC claimed such representations constituted deceptive acts or practices under Section 5 of the Fair Debt Collection Practices Act (FDCPA).
The Consent Decree provides that, in making representations about a debt, Asset can rely on information from the original creditors “in the absence of a reasonable indication that such information is incomplete, inaccurate, unreliable, or does not substantiate the claim.”
Last year, a number of states adopted or proposed more stringent documentation requirements as a predicate for filing collection actions. (One example is the Delaware requirements described in a June 2011 legal alert.) The FTC’s claim that the filing of collection actions based on unreliable account data can constitute a deceptive practice may provide a new basis for consumers to challenge collection actions under state laws prohibiting unfair or deceptive trade practices.
The FTC complaint against Asset also charged that other practices violated Section 5 of the FDCPA. The Consent Order, under which Asset agrees to pay a $2.5 million civil penalty, includes the following additional requirements:
- If a consumer questions or disputes information relied on by Asset in collecting a debt, Asset must either (a) close the account, permanently terminate collection efforts, and request deletion of the item from the consumer’s credit report, or (b) report the dispute to consumer reporting agencies and conduct a reasonable investigation into the accuracy or completeness of the disputed information. If it cannot substantiate the debt or permanently terminates collection efforts, then Asset is barred from selling or otherwise transferring the debt to any corporate entity other than the original creditor.
- If Asset knows or should know that a debt is past the statute of limitations, it must disclose in its initial communication with the consumer (or in its next communication after acquiring such information) that, because of the debt’s age, Asset will not sue the consumer for it. Under certain circumstances, Asset may have to re-disclose this information to the consumer. Asset may not initiate an arbitration or legal action to recover any debt for which it has provided this disclosure. In any contracts to sell such a debt, Asset must include a notice to the buyer that it is not selling all of its rights to collect the debt and is expressly withholding from the sale any rights it may have to initiate any arbitration or legal action to recover the debt.
- Asset must notify consumers that is has provided negative information to a consumer reporting agency within 30 days of providing the information.
The FTC’s enforcement action against Asset is part of an overall effort by the FTC to target the debt collection industry. This industry, and creditors attempting to collect their own debts, are currently experiencing the spread of documentation-related challenges used in mortgage foreclosures to collection actions involving credit card, student loan, and other types of non-mortgage consumer debts.