Although the Fair Debt Collection Practices Act (FDCPA) was enacted decades ago, its amorphous scope continues to frustrate the industry. The FTC recently cautioned debt collectors and creditors alike of the surprising breadth of the meaning of “debt collector” and the scope of the FDCPA. The FDCPA defines “debt collector” as “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” § 803(6). This broad definition is dampened somewhat by the FDCPA’s exclusions, including creditors who seek to collect their own debts—allowing many creditors to breathe a sigh of relief. However, the FDCPA also includes within debt collector any “creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts.” The nuances of this exclusionary language create more litigation than you might expect – a cautionary tale for creditors relying on its ability to collect its own debt free of the risks and requirements imposed by the FDCPA.
First, the least sophisticated consumer standard can render an original creditor a debt collector when the creditor’s communications with the consumer are unclear. Hamlett v. Santander Consumer USA Inc., a case heard by the U.S. District Court for the Eastern District of New York, demonstrates just how easily a creditor can fall into this trap. Santander filed a motion to dismiss plaintiff’s FDCPA claims arguing that it was not a debt collector, but simply a creditor collecting its own debt. The court first noted that it is well established that an assignee of a debt that is in default at the time the debt was obtained, which was the case with regard to defendants here, is considered a debt collector for purposes of the Act. However the court held that Santander is a debt collector for other reasons. As noted above, where a creditor uses any name other than its own, indicating that a third person is collecting the debt, the creditor constitutes a debt collector pursuant to the Act. The court emphasized that the triggering of the FDCPA does not depend on whether a third party is in fact involved in the collection of debt, but rather whether a least sophisticated consumer would have the false impression that a third party was collecting the debt. Here, plaintiff alleged that the communication sent by defendant to plaintiff stated, “this is an attempt to collect a debt . . . . This communication is from a debt collector.” The court found that, irrespective of the sophistication of the consumer, the communication gave the impression that defendant was a debt collector trying to collect a debt. As a result, the court held that defendant could not as a matter of law establish that it was a creditor exempt from the FDCPA. See 931 F. Supp. 2d 451 (E.D.N.Y. 2013).
Other cases suggest that the amount of control imposed on third-party debt collectors by debt purchasers may subject a debt owner to the FDCPA by way of an “indirect” attempt to collect a debt. Polanco v. NCO Portfolio Mgmt., Inc. is such an example. There, the U.S. District Court for the Southern District of New York found defendant, an entity that purchases defaulted debt and places them for collection with other agencies, in violation of the FDCPA. The parties vehemently disputed whether or not defendant was considered a “debt collector” as defined by the Act. The Court found that it was. Defendant argued that it was not a debt collector because it purchases debts but does not have any interaction with customers nor undertake any collection activities, instead relying on third party debt collectors. The court disagreed explaining that the plain language of the Act accounts for situations in which a debt collector uses indirect means to collect a debt. It held that hiring a third party debt collection agency or law firm to assist in everyday debt collection activities falls squarely within this definition particularly where, as was the case here, the third party entities worked pursuant to governing procedures provided by the debt collector. See No. 11-CV-7177 (DAB), 2015 WL 5637531 (S.D.N.Y. Sept. 23, 2015). While this case addressed a situation where a purchaser of a debt, rather than the original creditor, engaged third-party collection agencies to collect on its behalf, the holding is a warning sign for creditors contemplating unique debt collection strategies that involve the sale of debt to affiliates who then hire third-party agencies, but in doing so impose strict guidelines and procedures on collection activity.