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  4. Background and Summary of the Fair Debt Collection Practices Act

Background and Summary of the Fair Debt Collection Practices Act

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The Fair Debt Collection Practices Act (15 USC 1692) became effective on March 20, 1978. The act is designed to eliminate abusive and deceptive debt collection practices and to ensure that reputable debt collectors are not competitively disadvantaged. The act specifically prohibits the issuance of any regulations to implement it. However, the Federal Trade Commission has authority to issue advisory opinions.
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COVERAGE (§ 803)

The act is applicable only to a person or institution that regularly collects or attempts to collect, directly or indirectly, consumer debts asserted to be owed to another person or institution. Consumer debt is that debt incurred by an individual primarily for personal, family, or household purposes. Debts incurred for business or agricultural purposes are not covered. The following are not covered by the act:
  • officers or employees of a bank who collect, in the bank’s name, debts owed to the bank
  • attorneys-at-law collecting debts on behalf of the bank
  • legal process servers
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BANK AS A DEBT COLLECTOR

The act is applicable to banks that regularly collect debts for other unrelated institutions, including collections under reciprocal service agreements. Typically under such an arrangement, a bank solicits the help of another bank in collecting a defaulted debt of a consumer who has relocated. A bank would also be subject to the requirements of the act if it uses a name other than its own in its collection efforts.
A bank is not a debt collector subject to the act when it—
  • collects debts due another only in isolated instances;
  • collects, in the bank’s own name, debts owed to the bank;
  • collects a debt that it originated and sells even though it services the debt, for example, mortgages and student loans;
  • collects a debt not in default when obtained;
  • collects a debt obtained as security for a commercial credit transaction involving the bank;
  • collects a debt incidental to a bona fide fiduciary relationship or escrow arrangement, for example, debt held in the bank’s trust department; or
  • collects a debt for another person to whom it is related by common ownership or corporate control, as long as it does so only for those persons to whom it is so related. However, if the bank regularly collects defaulted debts owed a nonaffiliate person, the bank will become a debt collector for those defaulted debts as well as for defaulted debts of affiliated entities, but not for its own debts.
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Requirements

As a debt collector, the bank must—
  • cease further communication with a consumer upon his or her written request, except to advise the consumer that the debt collector’s efforts are being terminated or that specified remedies may or will be invoked (§ 805);
  • apply payments in accordance with the consumer’s instructions (§ 810); and
  • notify the customer in writing, within five days of initial contact, of the amount of the debt, the name of the creditor, and the debt collector’s duty to verify the debt if it is disputed. If the consumer disputes the debt within 30 days, the debt collector must stop collection efforts until verification is sent to the customer. (§ 809)
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Prohibitions

As a debt collector, a bank is prohibited from the following:
  • generally, contact with all third parties, including employers, except to obtain information concerning the consumer’s location (§ 805)
  • contact with a consumer at an unusual time or place, unless agreed to by the consumer (§ 805)
  • abusing or harassing any person in the collection of a debt, for example, threatening violence or using profane language (§ 806)
  • communicating or threatening to communicate false credit information or falsely implying that collection documents represent legal process (§ 807)
  • engaging in unfair practices, for example, misusing postdated checks or communicating by postcard (§ 808)
  • bringing a debt collection action in a jurisdiction other than those permitted by the act (§ 811)
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PENALTIES AND LIABILITIES

Private civil action must be brought within one year from the date of the violation. In an individual action, a bank may be liable for actual damages plus punitive damages of up to $1,000. In a class action, a bank may be liable for actual damages, as well as punitive damages of up to $1,000 for each named plaintiff and the lesser of $500,000 or 1 percent of net worth for all other class members. (§ 813)
Other penalties or liabilities imposed on the bank fall within the scope of the general regulatory authority of the Federal Reserve System, including its authority under section 8 of the Federal Deposit Insurance Act to issue cease-and-desist orders and to require affirmative action to correct conditions resulting from violations. (§ 814)
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