Creditors and debt collectors who utilize pre-collect practices should pay close attention to a recent opinion from the Eastern District of Michigan. In Parker Burns v. Ross Stuart & Dawson, Inc., 2016 U.S. Dist. LEXIS 165587 (E.D. Mich. Dec. 1, 2016), the collection agency agreed to provide the creditor with demand letter services which involved a series of three letters per debt account. Each letter contained a remittance slip, return address and telephone number provided by the creditor. The consumer filed suit alleging “[d]efendants are violating §§1692e and e(10) of the FDCPA ‘with a contracted scheme and plan to using [sic] false, deceptive and misleading representations and means in connection with the collection of debts… using letters such as [the letter sent to Plaintiff].” Id. at *6. The consumer further alleged that the creditor violation 15 U.S.C. §1692e(14) by using the collection agency ”to conduct its own debt collection under the guise of just being the creditor even though the letter…is written to promote all contact and collection efforts” by only the creditor. Id. at *6-7. The creditor moved to dismiss the FDCPA claims asserting that it was not a debt collector and that it was not engaged in a “flat rating” scheme.
While the FDCPA generally does not subject creditors to liability, there is one exception: creditors may be liable when the creditor “in the process of collecting its own debts, uses any name other than his own which would indicate that a third person is collection or attempting to collect such debts.” 15 U.S.C. §1692a(6). A creditor may be liable under section 1692a(6) when it participates in “flat rating.” “Flat rating” is prohibited under section 1692j of the FDCPA and occurs when a series of collection letters bearing the letterhead of the collection agency is sold to a creditor but the collection agency is not actually involved in the collection efforts.
In reviewing the letters at issue here, the court set forth a number of factors to be considered when determining whether a collection agency’s participation in debt collection activities is enough to maintain a creditor’s exemption under the FDCPA. Factors weighing in favor of voiding the creditor’s exemption include:
- The collection agency is acting as a “mere mailing service”;
- The letter states that if the debtor does not pay, the account “will be referred for collection”;
- The collection agency is paid for sending the letters and not based on a percentage of the collection;
- The collection agency does not receive payments;
- The collection agency does not initiate further action if there is no response to the letter;
- The collection agency does not receive files of the debtors;
- The collection agency never discusses the collection process or what next steps should be taken;
- The collection agency is not authorized to initiate calls;
- The collection agency is not authorized to negotiate payment;
- Any correspondence received by the collection agency is forwarded to the creditor for response;
- The letters do not include the collection agency’s address or telephone number;
- The letters direct questions and payments to the creditor directly;
- The creditor maintains substantial control over the content of the letters; and
- The collection agency does not provide traditional debt collection services, including location services, direct contact with the debtor.
Id. at *12-14. In this case, the court found that there was sufficient facts to assert the creditor was a debt collector under section 1692a(6). The court found that the creditor paid the collection agency based on the number of letters sent, not on the percentage of debts collected. Moreover, the letter directed the consumer to send payments to the creditor’s address or pay the creditor by credit card and directed consumers contact the creditor with any questions. Additionally, the court concluded after reviewing the parties’ agreement that, aside from sending the letters, it did not provide for the collection agency to have any further involvement in the collection activity.
Collection agencies and creditors who are involved in pre-collect services should review the opinion carefully in conjunction with the provisions of 15 U.S.C. §1692j to insure the collection agency’s services are structured in such a way to avoid the collection agency being held liable for flat rating and to preserve the creditor’s status as a party not subject to the FDCPA.