4.3 Nature of the Fair Debt Collection Practices Act

• Library: Debt Collection for Virginia Lawyers: A Systematic Approach (Virginia CLE) (2018 Ed.)

4.3 NATURE OF THE FAIR DEBT COLLECTION PRACTICES ACT

4.301 Congressional Purpose. Congress enacted the FDCPA in 1977, amending the 1968 Consumer Credit Protection Act ⁴ to eliminate "abusive, deceptive, and unfair debt collection practices" by debt collectors. ⁵

4.302 Applicability to Attorneys. The FDCPA originally exempted attorneys "collecting a debt as an attorney on behalf of and in the

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name of a client" from its requirements. ⁶ In 1986, however, the exemption for attorneys was eliminated. ⁷

4.303 Exception for Formal Pleadings. The FDCPA was again amended in 1996, this time to expand its disclosure requirements and to provide an exception for "a formal pleading made in connection with a legal action." ⁸

4.304 Initial Communication. ⁹ Amendments to the FDCPA in 2006 created an exception for bad check enforcement programs operated by private entities under the auspices of a criminal prosecutor's office. ¹⁰ The amendments also clarified that a formal pleading does not constitute an initial communication under the FDCPA. ¹¹

The amendments further clarified that notices sent in compliance with the Internal Revenue Code, the Gramm-Leach-Bliley Act, or federal or state laws or regulations relating to notice of data security breach or privacy conflicts, do not constitute an initial communication under the FDCPA. ¹²

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Finally, the amendments established a "right to collect within the first 30 days," clarifying that the 30-day validation period is not a blanket moratorium on collection efforts. ¹³

4.305 Applicability Limited to "Consumer" Debt. The FDCPA defines "debt" as "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment." ¹⁴ A "consumer" is "any natural person obligated or allegedly obligated to pay any debt." ¹⁵ For this reason, the applicability of the FDCPA is not affected by questions concerning the validity of the debt being collected. ¹⁶

4.306 Applicability to Particular Types of Debts. There has been a substantial amount of litigation concerning the applicability of the FDCPA to various types of consumer debt.

A. "Debts" Under the FDCPA.

1. Bad Checks. The prevailing line of cases holds that a bad check is a "debt" within the meaning of the FDCPA. ¹⁷ It has been held, however, that statutory civil penalties are not "debts" within the meaning of the FDCPA. ¹⁸

2. Administrative and Other Fees. The definition of "debt" has been extended to include administrative and other fees in a rental car contract. ¹⁹

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3. Homeowners' Association and Condominium Assessments. The Seventh and Tenth Circuits and the Eastern District Virginia have held that an assessment owed to a homeowners' or condominium association is a "debt" under the FDCPA. ²⁰ The Western District of Virginia reached a contrary result in Nance v. Petty, Livingston, Dawson, & Devening, ²¹ based on the analysis that the debt in question was not incurred for "personal, family or household purposes." The Eleventh Circuit has held that a property management company collecting unpaid homeowners' association assessments was exempt from the FDCPA under the "bona fide fiduciary" exemption. ²²

4. Foreclosures. In Wilson v. Draper & Goldberg, P.L.L.C., ²³ the Fourth Circuit held that foreclosing "trustees, including attorneys, acting in connection with a foreclosure can be 'debt collectors' under the Act." ²⁴ Although the court used the permissive "can," and made it clear that its decision was "not intended to bring every law firm engaging in foreclosure proceedings under the ambit of the Act," ²⁵ the better practice may be to treat residential foreclosures as debt collection and to comply with the FDCPA during the foreclosure process.

The majority opinion in the Wilson case concluded that "a trustee's actions to foreclose on a property pursuant to a deed of trust are not 'incidental' to its fiduciary obligation. Rather, they are central to it. Thus, to the extent Defendants used the foreclosure process to collect Wilson's alleged debt, they cannot benefit from the exemption contained in § 1692a(6)(F)(i)." ²⁶

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In reaching this conclusion, the majority relied in part on the FTC Official Staff Commentary on the Fair Debt Collection Practices Act. ²⁷

The exemption (i) for bona fide fiduciary obligations or escrow arrangements applies to entities such as trust departments of banks, and escrow companies. It does not include a party who is named as a debtor's trustee solely for the purpose of conducting a foreclosure sale (i.e., exercising a power of sale in the event of default on a loan).

The Wilson majority's construction of the statutory term "incidental to," and its reliance on the FTC Official Staff Commentary, were both criticized by the dissent, which cited the Senate committee report explaining the purpose of the amendment: "the committee does not intend the definition [of debt collector] to cover the activities of trust departments, escrow companies, or other bona fide fiduciaries. (Italics added.)" ²⁸ The dissenting judge argued that the language of the FTC Staff Commentary "conflicts not only with the statutory text but also with the Senate report set forth above" ²⁹ and cited the Commentary itself, which states that "it is not clear whether the FTC has the authority to issue the Commentary [and] courts have little difficulty disregarding Commentary positions [viewed] as incorrect." ³⁰

There is a clear and continuing split among the circuits as to whether non-judicial foreclosures are "debt collection, although the clear trend is toward finding foreclosures to be debt collection. ³¹ In one early case, the Third Circuit merely treated foreclosures as "debt collection" for purposes of determining whether the attorney was a "debt collector." ³² The Fourth Circuit

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in 1999 had affirmed on other grounds a case in which the United States District Court for the Northern District of West Virginia held that "merely foreclosing on the property pursuant to the deed of trust" does not fall within the terms of the FDCPA. ³³

Some trial courts have distinguished judicial foreclosures from non-judicial foreclosures, exempting only the latter. ³⁴ In a case involving loan servicing but not foreclosure, the Seventh Circuit emphasized that "a communication from a debt collector to a debtor is not covered by the FDCPA unless it is made 'in connection with the collection of any debt,'" but concluded that "the absence of a demand for payment is just one of several factors that come into play in the commonsense inquiry of whether a communication from a debt collector is made in connection with the collection of any debt." ³⁵ Even explicit statements from the debt collector expressing that a letter was not meant to collect a debt were unavailing, however, and the court held that the FDCPA applied because the true purpose of the letters was "to induce the debtor to settle a debt." ³⁶

5. Delinquent Rent; In Rem Eviction Proceedings. In Romea v. Heiberger & Associates, ³⁷ the court held that the requirements of the FDCPA apply to an attorney's delivery of the three-day rent demand notice required by New York law as a condition precedent to a summary eviction proceeding. Relying in part on the rationale adopted by the Third Circuit in Piper v. Portnoff Law Associates, ³⁸ the New Jersey Appellate Division has held that in rem proceedings for possession of leased premises are subject to the requirements of the FDCPA. ³⁹ The New Jersey Supreme Court

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has held that summary dispossess actions for failure to pay rent in federally subsidized apartments are subject to the FDCPA. ⁴⁰

6. Medical Bills. In Pipiles v. Credit Bureau of Lockport, Inc. ⁴¹ and Creighton v. Emporia Credit Service, Inc., ⁴² the courts held that the requirements of the FDCPA apply to the collection of medical bills.

7. Insurer's Subrogation Claims. In Hamilton v. United Healthcare of Louisiana, Inc., ⁴³ the court held that an insurance company's subrogation claim for medical bills paid to its insured is a "debt" under the FDCPA.

8. Municipal Utility Bills. In Piper v. Portnoff Law Associates, ⁴⁴ the court held that municipal water and sewer bills that are enforced by liens filed against the consumer's house are subject to the FDCPA.

9. PayPal Obligations. The Eleventh Circuit has held that a consumer's PayPal obligations are subject to the FDCPA. ⁴⁵

B. Not "Debts" Under the FDCPA.

1. Taxes. The Second and Third Circuits have held that taxes are not "debts" within the meaning of the FDCPA. ⁴⁶

2. Child Support Payments. In Mabe v. G.C. Services Ltd. Partnership, ⁴⁷ the court held that child support obligations are not "debts" under the FDCPA, because they are not incurred to receive consumer goods or services.

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3. Civil Penalties. Statutory civil penalties are not "debts" within the meaning of the FDCPA. ⁴⁸

4. Tort Claims. The Ninth Circuit has held that a tort claim for wrongful conversion does not constitute a debt under the FDCPA. ⁴⁹

5. Municipal Fines. The Seventh Circuit has held that municipal fines related to the debtor's former ownership of real property did not constitute debts under the FDCPA. ⁵⁰

6. Debt Resulting from Theft. The Second Circuit has held that debt resulting from the theft of unmetered natural gas was not subject to the FDCPA. ⁵¹

4.307 Applicability Limited to "Debt Collectors."

A. In General. The FDCPA defines a "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 any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another." ⁵² A person is therefore...