A recent decision by the U.S. Court of Appeals for the 11th Circuit suggests that debt collectors who rely in good faith on erroneous information provided by creditors are at risk for liability under the Fair Debt Collection Practices Act (FDCPA).
In Owen v. I.C. System, Inc., issued on January 7, 2011, the 11th Circuit held that the FDCPA's bona fide error defense did not shield the debt collector from liability when it relied on information from the creditor in sending collection letters demanding payment of interest charges that were not properly owed. That defense requires a debt collector to show that its FDCPA violation was "not intentional," resulted from a "bona fide error," and occurred despite the collector’s "maintenance of procedures reasonably adapted to avoid any such error."
As a threshold matter, the 11th Circuit did not treat the creditor’s mistake as a mistake of law that falls outside the bona fide error defense under the U.S. Supreme Court’s decision in Jermaine v. Carlisle. In reaching this conclusion, the Court found that there was no evidence that the debt collector exercised any legal judgment as to the charges; instead, it “indiscriminately accepted the [creditor’s] interest charges as factually accurate and proceeded to collect them.”
The debt collector argued that it had a procedure reasonably adapted to avoid FDCPA errors, and thus was entitled to the benefit of the bona fide error defense because it had obtained a contractual representation from the creditor that the debts placed for collection were "validly due and owing." Although it acknowledged that the FDCPA does not require a debt collector to independently investigate and verify the validity of a debt to qualify for the bona fide error defense, the 11th Circuit rejected the debt collector's argument because the errors in question did not require an investigation of the validity of the charges; they were apparent from a "cursory review" of the documents provided by the creditor. Because the debt collector had no "internal, error-correction procedures to avoid miscalculation of debt amounts, such as interest on past-due interest or extra fees beyond the debtor’s unambiguous written agreement," its "procedure [was] to outsource its oversight task to its creditor." This did not suffice.
Debt collectors have two choices in addressing situations of this type:
- Rely upon creditor representations and indemnities (preferably after evaluating the creditor’s integrity, competence, and financial strength).
- Periodically review their procedures for avoiding FDCPA violations with counsel and have counsel periodically audit their compliance with those procedures to ensure the successful assertion of a bona fide error defense.