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UNITED STATES OF AMERICA

FEDERAL TRADE COMMISSION

WASHINGTON, D.C. 20580

Office of the Chairman

March 17, 1997

The Honorable Albert Gore, Jr.

President of the Senate

United States Senate

Washington, D.C. 20510

RE: Nineteenth Annual Report to Congress Pursuant to Section 815(a) of the Fair

Debt Collection Practices Act

Dear Mr. President:

The Federal Trade Commission ("Commission") is required by Section 815(a) of the Fair

Debt Collection Practices Act ("FDCPA" or "Act"), 15 U.S.C. 1692-1695o, to submit a

report to Congress each year summarizing the administrative and enforcement actions

taken under the Act over the preceding twelve months. These actions are part of the

Commission's ongoing effort to curtail abusive, deceptive, and unfair debt collection

practices in the marketplace. Such practices have been known to cause various forms of

consumer injury, including emotional distress and invasions of privacy, and can severely

hamper consumers' ability to function effectively in the workplace. Although the

Commission is vested with primary enforcement responsibility under the Act, overall

enforcement responsibility is shared by other federal agencies. Additionally, consumers

who believe they have been victims of statutory violations may seek relief in state or

federal court.

This report makes a number of recommendations for changes in the FDCPA that the

Commission believes will improve its clarity. It also presents an overview of the types of

consumer complaints received by the Commission over the past year as well as a

summary of the Commission's formal and informal enforcement initiatives. Finally, it

outlines the activities and recommendations of the other federal agencies responsible for

administering and enforcing the Act with regard to entities under their respective

jurisdictions.

INTRODUCTION

Although the Fair Debt Collection Practices Act prohibits abusive, deceptive, and

otherwise improper collection practices, it permits reasonable collection efforts that

promote repayment of legitimate debts. Thus, the Commission's enforcement goal is to

ensure compliance with the Act without unreasonably impeding the collection process.

The Commission recognizes that the timely payment of debts is important to creditors

and that the debt collection industry offers useful assistance toward that end. The

Commission also appreciates the need to protect consumers from those few debt

collectors who engage in abusive and unfair collection practices.

Congress enacted the FDCPA in an effort to balance the debt collector's right to recover

just obligations with the consumer's right to protection from harassment, deceit,

invasions of privacy, interference with the employment relationship, and other abusive

collection tactics. Many members of the debt collection industry supported this
legislation when it was proposed, and most debt collectors now voluntarily conform their

practices to the standards the Act imposes. The Commission staff continues to work with

industry groups to clarify ambiguities in the law and to educate the industry and the

public regarding the Act's requirements.

CONSUMER COMPLAINTS

Consumer complaints are the Commission's primary source of information concerning

compliance with the Act; debt collection continues to be a principal subject of many of

the complaints received by the Commission. We also receive occasional contacts from

debt collectors who express concern about the practices of competitors. Debt collectors

object to the violative practices of others because such behavior may place them at a

competitive disadvantage, causing them to lose business to collectors who violate the

law.

Most of the Commission's information about how debt collectors are complying with the

Act, however, comes from consumers. Some of the complaints we receive allege

violations involving substantial consumer injury and, therefore, are a source of

immediate concern. We continue to believe that the number of consumers who contact

the Commission represents a relatively small percentage of the total number of

consumers who actually encounter problems with debt collectors.(1) Experience indicates

that some consumers may not even be aware that the Commission enforces the Act.

Not all consumers who complain to the Commission about collection problems have

experienced law violations. In some cases, for example, consumers complain that a debt

collector will not accept partial payments on the same installment terms that the original

lender provided when the account was current. Although a collector's demand for

accelerated payment or larger installments may, in these circumstances, be frustrating to

the consumer, such a demand is not a violation of the Act. In other cases, it is unclear

whether the conduct at issue violates the law. In these cases, we must review the

evidence, which often includes copies of dunning notices, consumer and collector

correspondence, contracts, warranties, or sales agreements. However, many consumers

complain of conduct that, if accurately described, clearly violates the Act. Although

consumer complaints tend to follow relatively consistent patterns, in any given year we

may see an increase in complaints about a practice that has been mentioned infrequently

in previous years.

In the past year, a few debt collectors apparently continued to abuse consumers over the

telephone in the course of their collection efforts. Profane or obscene language, as well as

racial and ethnic slurs, were employed. Consumers complained that collectors called

them at work even when the collectors knew that employers prohibited such calls or

otherwise had reason to know that employers objected to their workers receiving such

calls on the job. Consumers alleged that some collectors made repeated telephone calls

within a brief period, hung up abruptly and then called back immediately; some

collectors also called in the early morning or late evening. All of these practices clearly

violate the Act.

Another concern involves the use of false or misleading threats of what might happen if a

debt is not paid. These include threats to institute civil suit or criminal prosecution,

garnish salaries, seize property, cause job loss, have a consumer jailed, or damage or ruin

a consumer's credit rating. Some of these practices, such as those involving false threats

of the consequences of nonpayment, are specifically prohibited by the Act. Other

practices, such as the threat to cause a consumer's arrest, violate the Act only if the

collector does not have the legal authority or intent to accomplish the promised result.
We continue to receive complaints about unauthorized third party contacts. Some

collectors persist in telephoning uninvolved third parties without the consumer's consent.

Consumers' employers, relatives, children, neighbors, and friends have been contacted

and informed about consumers' debts. Such contacts typically embarrass or intimidate the

consumer and are a continuing aggravation to third parties. Contacts with consumers'

employers and co-workers about their alleged debts jeopardize continued employment

and prospects for promotion. Relationships between consumers and their families,

friends, or neighbors may also suffer from improper third party contacts. In some cases,

collectors reportedly have used misrepresentations as well as harassing and abusive

tactics in their communications with third parties. Unless authorized by the consumer or

unless they fall within one of the Act's exceptions, third party contacts for any purpose

other than obtaining information about the consumer's location violate the Act and are an

invasion of the consumer's privacy.

Some debt collectors continue to violate the Act by sending consumers collection letters

falsely representing the active involvement of an attorney in the collection effort.

Attorneys who are employees of debt collectors may not permissibly use "attorney-atlaw" stationery without disclosing the identity of their debt collector-employer. Failure to

disclose the nature of their employment in these circumstances may falsely imply to the

consumer that the debt collector has retained a private attorney to pursue legal action.

Additionally, some debt collectors send letters to consumers under an attorney letterhead,

signed by an attorney, when the attorney (1) has little or no involvement with either the

letters or the consumers to whom the letters are sent and/or (2) has no intent to take legal

or other action if the consumers' debts are not paid. These letters often falsely represent

or imply that the attorney signing them has studied a given consumer's file and concluded

that the consumer is a candidate for legal action. Thus, they violate Sections 807(5) and

(10) of the Act.

Consumers who dispute the amounts of their debts or who believe they do not owe the

debts in question complain that debt collectors fail to respond to their dispute letters, fail

to provide proper verification of their debts, and fail to cease collection upon receipt of a

written dispute letter as required by the Act. These failures frustrate some of the Act's

primary self-help provisions, which are designed to prevent debt collectors from

continuing to dun the wrong person, collecting amounts in excess of what is owed, or

attempting to collect debts that they are unable to verify.

The Commission continues to receive complaints against creditors collecting their own

debts. Some consumers allege that creditors often allude to the fact that creditors are not

generally covered by the FDCPA. In particular, complaints concerning medical and

hospital debts are becoming more evident. Some consumers allege that they never

receive a final statement from the medical service provider and their accounts are

forwarded, without further notice, to collection agencies which attempt to charge

exorbitant interest, late fees and other collection costs in addition to the original debt.

Some of these charges can exceed the debt itself. Insurance providers, in some cases,

may never have informed consumers that the consumer had not paid the whole amount

due.

Finally, the Commission has received two relatively new types of complaints this year in

gradually increasing amounts.

One concerns the collection of illegal surcharges in connection with the principal debt,

when the charges are not expressly authorized by the agreement creating the debt or

permitted by law. Even if surcharges or fees are permitted by law, some collectors may

misrepresent the amounts that can lawfully be collected. This often results in surcharges

far greater than those to which the debt collector is entitled.
The second area of concern involves the communication of credit information which is

known or should be known to be false. This can include information about which a

dispute has been received. Consumers are sensitive about the content of their credit

reports. Many believe that their credit reports are inaccurate because of inaccurate or

disputed entries submitted by debt collectors. As always, the Commission staff will

monitor developments in these areas.

THE ENFORCEMENT PROGRAM

The Commission's FDCPA enforcement program is diverse and consists of a number of

initiatives. Industry and consumer education efforts are an integral part of this program.

The Commission staff's continuing colloquy with industry members, attorneys, and other

interested parties has the effect of informing debt collectors of their responsibilities under

the Act. These informal education efforts alert debt collectors to potential violations and

encourage their voluntary compliance. In circumstances where debt collectors choose not

to remedy FDCPA violations on their own and the violations are too serious or sweeping

to handle informally, the Commission may choose to take formal enforcement action.

Formal enforcement action, depending upon the particular facts, may result in litigation

to compel compliance with the Act.

EDUCATION AND INFORMAL ENFORCEMENT

Industry and consumer education, information-sharing, and informal enforcement

activities are important aspects of the Commission's enforcement program. Commission

resources are more efficiently used by promoting voluntary compliance, when possible,

and reserving formal legal procedures, such as litigation, for more severe and injurious

violations of the Act.

Staff's ongoing participation in industry conferences and workshops has aided industry

members in gaining increased familiarity with the Act's requirements and the way in

which the Commission staff has interpreted them. We continue to maintain an informal

communications network with major trade associations, which provides a mechanism for

the exchange of information and ideas and a forum for discussions of potential problems

that arise in the course of the Commission's enforcement efforts. These contacts have

proven a useful resource for both the Commission staff and the industry. Difficulties that

debt collectors have in complying with the Act are a frequent topic in these discussions.

When staff becomes aware of problematic collection activities that do not appear to be

serious violations of the Act, the debt collector under scrutiny may be notified and

requested to conform the activities in question to the requirements of the Act. On

occasion, staff refers complaints to debt collectors for individual resolution and asks that

they report to the Commission on the disposition of the complaints. The Commission

believes that obtaining compliance with the Act in this manner is a cost-effective

enforcement tool that saves time and resources.

As we have stated in previous reports, Congress amended the Act in 1986 to remove the

exemption for attorneys. Previously, attorneys collecting debts on behalf of clients were

specifically exempted from the definition of "debt collector" in the Act.(2) By amending

the Act to remove the exemption (Public Law 99-361), Congress brought within the

scope of the Act attorneys who regularly collect debts for third parties.(3)

Since the exemption was eliminated, however, courts differed on exactly how the Act

should address the various forms of debt collection in which attorneys engage. Some

courts held that attorneys engaged solely in collection litigation, i.e., the filing and
prosecuting of lawsuits, as opposed to more traditional debt collection activities such as

sending dunning letters and making telephone calls, are not covered by the Act.(4) These

courts based their conclusions on the Act's legislative history,

(5)

 the Commission's Staff

Commentary on the Act(6) and the seemingly anomalous results produced by requiring

litigating attorneys to comply with some of the Act's requirements.(7) Others held that, no

matter what sort of collection activity attorneys conduct, the Act applies if they engage in

it regularly, based upon the literal language of the definition of "debt collector" in

Section 803(6).(8)

Last year, the Commission reported to the Congress that the United States Supreme

Court resolved this dispute, affirming the Seventh Circuit, which held that the Act covers

attorneys and law firms engaged in litigation to collect debts.(9) The Court held that

lawyers who regularly collect debts through legal proceedings meet the Act's definition

of debt collector in Section 803(6) and that when Congress repealed the attorney

exemption, it did not carve out an exception for litigation-related collection efforts.

Additionally, it held that the plain language of the Act overrides contrary postenactment

statements by one of the repeal's sponsors, the Commission's Staff Commentary on the

Act and whatever anomalous results that could occur.

(10)

The Commission staff continues to consider the implications of this decision on the

collection activities of attorneys in various stages of collection litigation. In its

interpretations, staff is attempting to clarify the FDCPA's application to these attorneys in

specific situations and routinely provides guidance as needed. It will continue to

disseminate pertinent information in this and other areas to the entire collection industry

as widely and as effectively as possible.

In 1996, the Congress amended Section 807(11) of the Act to clarify its meaning in light

of two conflicting appellate court decisions on the Section and in response to

Commission recommendations of the past several years. Before the amendment, Section

807(11) required a debt collector to "disclose clearly in all communications made to

collect a debt or to obtain information about a consumer, that the debt collector is

attempting to collect a debt and that any information obtained will be used for that

purpose." As noted in last year's report, however, two appellate courts had disagreed on

when and how often the disclosure must be made -- one holding that it need only be

made in the first debt collection communication(11) and another holding that it must be

made in all such communications.(12)

The amendment resolved the conflict. Section 807(11) now requires the above-noted

disclosure to be given only in the initial written communication with the consumer and, if

the initial communication is oral, in that initial oral communication. Subsequent

communications must disclose only that they are from a debt collector. The Congress

also excepted "formal pleadings made in connection with a legal action" from any

disclosure requirement whatsoever. This clarification will benefit both consumers and

debt collectors alike. The Commission staff will continue to provide guidance to the

industry on Section 807(11) as needed.

Consumers who file complaints with the Commission regarding debt collection practices

are always advised of the FDCPA's self-help remedies as well as the numerous other

protections afforded to them by the Act. For example, consumers are advised of their

rights under Section 809 of the Act to obtain verification of the debt from the debt

collector upon request and to have all collection activities stopped until verification is

obtained. Additionally, consumers are regularly told about Section 805 of the Act, which
provides that consumers may require the collector to stop communicating with them

about the debt if they request it in writing. Finally, Commission staff advises consumers

of their private right of action, which enables them to bring legal action against debt

collectors who violate the Act. If successful, consumers may recover actual damages plus

additional damages of up to one thousand dollars as well as court costs and attorneys'

fees.

An informed public that enforces its rights under the FDCPA operates as a powerful,

informal enforcement mechanism. Consumers who are victims of unlawful debt

collection activities can provide significant policing of the industry. By using the

FDCPA's self-help remedies, these consumers often further the goals of the Act in the

process. Accordingly, consumer education remains an integral part of the Commission's

informal enforcement effort.

STATE EXEMPTIONS FROM THE FDCPA

Section 817 of the FDCPA permits states to petition the Commission for an exemption

from the provisions of the Act.(13) Pursuant to Section 817, the Commission promulgated

regulations shortly after the statute's enactment that provide criteria and establish

procedures whereby the Commission may exempt from the Act any debt collection

practice within a state.(14) To seek an exemption under the Act, a state must petition the

Commission for a determination that under the laws of that state, any class of debt

collection practices within that state is subject to requirements that are substantially

similar to, or provide greater protection for consumers than, the requirements of the

FDCPA. To obtain an exemption under the Act, the petitioning state must provide

documentation demonstrating that the state law provides protections substantially similar

to those of the FDCPA, and that the state has sufficient resources to enforce its law.

No petitions for exemption were received by the Commission during 1996.

FORMAL ENFORCEMENT

Commission staff selects firms for further investigation when complaints from

consumers, state and local agencies, or from other industry members suggest a pattern of

law violations not amenable to voluntary compliance efforts. Case selection is based

primarily, although not exclusively, on the extent of possible consumer injury.

If the investigation reveals evidence of continuing FDCPA violations, staff contacts the

debt collector and attempts to negotiate a settlement before recommending that the

Commission issue a complaint. If a settlement is reached and the Commission accepts

the staff's recommendation to approve a proposed consent order, the Commission

delivers the proposed order and accompanying complaint to the Department of Justice,

which files them in the appropriate federal district court.(15) If the debt collector will not

agree to an appropriate settlement that remedies the violations involved, the Commission

requests that the Department of Justice file suit in federal court on behalf of the

Commission, usually seeking a civil penalty and injunctive relief that prohibits the

collector from continuing to violate the Act. On occasion, debt collectors agree to an

appropriate settlement only after suit has been brought.

The Commission staff is currently conducting several non-public investigations of debt

collection agencies to determine whether they are or have engaged in serious violations

of the Act. In addition, there have been significant developments in five pending

Commission enforcement actions.
During 1996, the Commission, through the Department of Justice, concluded its

litigation against National Financial Services (NFS), a Maryland debt collection agency,

its owner, and an attorney who helped devise and mail the collector's dunning notices.

The district court earlier found that defendants had violated the FDCPA when they

threatened to take legal action against consumers without intending to do so, and when

they implied in their collection letters that an attorney was significantly involved in the

process when, in fact, the attorney's involvement was minimal.(16)

The district court also found that defendants violated the FDCPA when they sent

collection letters that effectively failed to give consumers notice of their right to require

NFS to verify their alleged debts. Defendants violated this requirement of the FDCPA by

(1) providing the disclosure in a type size so small, and in ink so faint, that the notice was

virtually illegible, and (2) in including other deadlines for payment that so overshadowed

and contradicted the disclosure that it was rendered ineffective. The court issued an

injunction against the defendants prohibiting these and other violations of the FDCPA.

In 1994, the Commission moved for the imposition of a substantial civil penalty against

the defendants based on their serious, persistent violations of the FDCPA. On July 20,

1995, the court assessed a civil penalty of $500,000 against the corporate defendant and

its owner and $50,000 against the attorney. Although defendants appealed the decision to

the Fourth Circuit Court of Appeals, the Fourth Circuit last year affirmed both the

injunction and the penalty.

(17)

In another matter, the Department of Justice, on behalf of the Commission, filed

complaints in the United States District Court for the Northern District of California

against Trans-Continental Affiliates (TCA), a moderately large debt collector

headquartered in California, and two of its principals, for a number of egregious

violations of the Act, including illegal consumer contacts at work and at home,

harassment, false threats of legal action and misrepresentations that nonpayment of a

debt constitutes a criminal offense.(18) The Department of Justice last year followed its

complaints with a motion for partial summary judgment against the corporation and the

two principals seeking to enjoin them from committing the violations alleged in the

complaints and seeking liability for civil penalties. The court granted the injunctive relief

against all parties, including the principals, since the United States had shown that the

principals had authority to control TCA's unlawful practices. While the court also granted

the motion for penalties with respect to TCA, it held that a determination of civil penalty

liability with respect to the individuals would require a trial because there was a disputed

issue of fact concerning the role they played in the law violations alleged. The trial is

scheduled to begin in May 1997.

In G & L Financial Services, Inc. (G & L), the complaint, filed in federal district court in

New Jersey, alleged that company collectors were engaging in abusive telephone contacts

with consumers and that certain of the company's dunning letters falsely suggested that

the company was a law firm. The Commission and G & L settled the matter in a consent

judgment containing an injunction prohibiting the practices, as well as all other violations

of the FDCPA, and assessing a $10,000 civil penalty.

(19)

United Creditor's Alliance Corp. (UCA), a major nationwide debt collection agency,

agreed to pay $146,000 in civil penalties and to extensive injunctive relief in settlement

of Commission allegations that it had repeatedly violated the FDCPA. The company was

charged with calling consumers after hours, using profane and abusive language, falsely

threatening consumers with arrest, wage garnishment and other legal action and engaging

in a variety of other FDCPA violations when attempting to collect debts from consumers.

The settlement, filed in the United States District Court for the Central District of
California, prohibits these practices, as well as all other FDCPA violations, assesses the

penalty noted above and requires that the debt collector disclose consumers' cease

communication rights on their dunning letters to consumers.(20)

Finally, the Commission is currently seeking to enforce a civil investigative demand

(CID) in its ongoing investigation of Lundgren and Associates, a law firm which the

Commission staff believes may have engaged in FDCPA violations in connection with

the collection of checks written on accounts without sufficient funds. Lundgren had

resisted our investigation on grounds that his debt collection activities were not covered

by the FDCPA because dishonored checks allegedly are not "debts" as defined in Section

803(5).(21) In 1996, the Commission issued a CID against Lundgren for further

information and documents related to the violations charged. Lundgren filed a motion to

quash the CID which the Commission denied. Despite the denial, the firm failed to

respond to the CID and the Commission filed an enforcement action in federal district

court in the Eastern District of California late last year. A hearing on the matter was held

in February of this year and Lundgren was ordered to comply.

LEGISLATIVE RECOMMENDATIONS

The Commission recommends four amendments to, or clarifications of, the FDCPA as

permitted by Section 815 of the Act.

A. Section 809(a) -- Clarity of Notice

The Commission continues to recommend that Congress amend Section 809 to make

explicit the standard for clarity to be applied to the notice required by that Section.

Section 809(a) of the Act requires debt collectors to send a written notice to each

consumer within five days after the consumer is first contacted, stating that if the

consumer disputes the debt in writing within thirty days after receipt of the notice, the

collector will obtain and mail verification of the debt to the consumer.

Some debt collectors print the notice required by Section 809(a) in a type size

considerably smaller than the other language in the dunning letter, or obscure the notice

by printing it on a non-contrasting background in a non-contrasting color. For example,

the use of light ink and tiny print on a white background was found to be a violation of

Section 809 in the National Financial Services case.(22)

Significantly, two courts of appeals have held that collection letters that use small or

otherwise obscured print in the notice required by Section 809(a) and at the same time

use much larger, prominent or bold-faced type in the text of the letter violate the Act.

Miller v. Payco-General American Credits, Inc., 943 F.2d 482 (4th Cir. 1991); Swanson

v. Southern Oregon Credit Services, Inc., 869 F.2d 1222 (9th Cir. 1989). The courts

reasoned that the payment demand in the text both contradicts and overshadows the

required notice.(23) Neither of the courts attempted to specify what elements of

presentation (e.g., the color and size of type, location in the document) would constitute a

clear disclosure to consumers of their dispute rights under Section 809(a) of the Act.

The Commission recommends that Congress eliminate this problem by amending

Section 809 explicitly to require a more conspicuous format for the notice by mandating

that it be "clear and conspicuous." That standard could be defined as "readily noticeable,

readable and comprehensible to the ordinary consumer." The definition could also

reference various factors such as size, shade, contrast, prominence and location that

would be considered in determining whether the notice meets the definition. As presently

drafted, the provision does not explicitly specify any standard for the 809(a) notice.
There are a number of decisions and orders that define the "clear and conspicuous"

standard in a variety of contexts. See, e.g., California Suncare, Inc., File No. 942-3218

(1997) (consent); Figgie International, Inc., 107 F.T.C. 313, 401 (1986).(24) Proper

application of such a standard in Section 809(a) would help ensure that the information

in the required notice is effectively conveyed and eliminate dunning letters artfully

designed to confuse their readers and frustrate the purposes of this provision of the

FDCPA.

B. Section 809(b) -- Effect of Thirty-day Period

Section 809(b) of the FDCPA provides that if the consumer, within the thirty-day period

specified in Section 809(a), disputes the debt in writing, the collector must cease all

collection efforts until verification of the debt is obtained and mailed to the consumer.

Until recently, this provision has been consistently interpreted to mean that the thirty-day

period was simply a time within which the consumer must act to take advantage of his or

her right to require the collector to verify the debt before making further collection

efforts.(25) Furthermore, it was generally understood that the intent of the Section was

simply to "eliminate the recurring problem of debt collectors dunning the wrong person

or attempting to collect debts which the consumer had already paid."(26)

Two federal courts of appeals decisions have strongly implied that the thirty-day period

is a firm grace period, making a demand for payment within the first thirty days

impermissible. Graziano v. Harrison, 950 F.2d 107, 111-13 (3d Cir. 1991); Swanson v.

Southern Oregon Credit Service, Inc., 869 F.2d 1222, 1226 (9th Cir. 1988).(27) The

Commission considers this interpretation erroneous.

As reflected by opinion letters issued by the staff of the Commission and in the Staff

Commentary on the FDCPA,(28) a debt collector may (unless or until the consumer

disputes the debt) continue to make demands for payment or take legal action within the

thirty-day period, so long as the debt collector's activities do not function to nullify,

disparage or overshadow the disclosure of the consumer's dispute rights under Section

809(a) or otherwise lead the consumer to believe that the disclosure is meaningless.

Nothing within the language of the statute indicates that Congress intended an absolute

bar to any appropriate collection activity or legal action within the thirty-day period

where the consumer has not disputed the debt. To the contrary, Section 809(b) simply

provides a time frame within which the consumer may insist, by disputing the debt in

writing, that the collector verify the debt with the creditor before continuing collection

activity.

These decisions have interjected an element of uncertainty in the law by effectively

treating the thirty-day time frame set forth in Section 809 as a grace period within which

collection efforts are prohibited, rather than a dispute period within which the consumer

may insist that the collector verify the debt. The Commission therefore recommends that

Congress clarify the law by adding a provision expressly permitting appropriate

collection activity within the thirty-day period if the debt collector has not received a

letter from the consumer disputing the debt. The clarification should include a caveat that

the collection activity should not overshadow or be inconsistent with the disclosure of the

consumer's right to dispute the debt specified by Section 809(a).

C. Section 803(6) -- Litigation Attorney as "Debt Collector"

As previously stated, the Supreme Court has resolved the conflict in the federal courts

concerning whether attorneys in litigation to collect a debt are covered by the Act. The
Court has said that they are, in fact, covered like any other debt collector because they

fall within the plain language of the statute. The difficulties in applying the Act's

requirements to attorneys in litigation, however, and the anomalies that result, still

remain. For example, pretrial depositions can violate Section 805(b). Pleadings will still

trigger the Section 809 disclosure, which will not make sense in a litigation context.(29)

If the consumer disputes the debt, the attorney/debt collector could be required to stop

the suit because Section 809(b) requires that collection activity cease until after

verification.

Because it still seems impractical and unnecessary to apply the FDCPA to the legal

activities of litigation attorneys, and because ample due process protections exist in that

context, the Commission continues to believe that Congress should intervene and make

its intent in this area clear. The Commission, therefore, recommends that the Congress reexamine the definition of "debt collector" and state that an attorney who pursues alleged

debtors solely through litigation (or similar "legal" practices) -- as opposed to one who

collects debts through the sending of dunning letters or making calls directly to the

consumer (or similar "collection" practices) -- is not covered by the statute.

D. Section 803(6)(F)(iii)

Section 803(6) of the FDCPA sets forth a number of specific exemptions from the law,

one of which is collection activity by a party that "concerns a debt which was not in

default at the time it was obtained by such person."(30) The exemption was designed to

avoid application of the FDCPA to mortgage servicing companies, whose business is

accepting and recording payments on current debts.(31) The theory behind the exemption

was that the Act should not apply to a business whose focus was the routine processing

of remittances (as opposed to the collection of delinquent accounts) simply because such

business continued to work an account after the account went into default.

The Commission staff has become aware, however, of a number of industry members

that acquire all of the accounts of their clients (hospitals or other service providers) at an

early stage when the accounts are current (sometimes called an "early out" program) and

then claim exemption from the FDCPA because each account constitutes a "debt that was

not in default when it was obtained" from the creditor. In fact, collection of delinquent

debts is the major focus of these businesses. Apart from the fact that they acquire

accounts prior to default, these businesses function in all respects like typical debt

collectors. Nevertheless, they can argue that they are exempt from the FDCPA.

The Commission believes that Section 803(6)(F)(iii) was designed to exempt only

businesses whose collection of delinquent debts is secondary to their function of

servicing current accounts. However, the existing formulation of the exemption, which

focuses on the status of the individual debts at the time they are obtained by the third

party, allows collectors that obtain current debts that routinely go into default to escape

the coverage of the FDCPA. Therefore, the Commission recommends that Congress

amend this exemption so that its applicability will depend upon the nature of the overall

business conducted by the party to be exempted rather than the status of individual

obligations when the party obtained them. For example, the provision could be redrafted

to exempt an activity that "is incidental to a business whose principal purpose is the

servicing of current debts for others" or words to that effect. In this manner, the mortgage

servicer (who acts more like a creditor than a debt collector) would not be covered even

though it might continue to collect the small fraction of its accounts that become

delinquent, but the debt collector that primarily collects delinquent accounts (regardless

of whether they were current when obtained) would be unmistakably within the scope of

the FDCPA.
ADMINISTRATION, ENFORCEMENT AND LEGISLATIVE

RECOMMENDATIONS BY OTHER AGENCIES

Section 814 of the FDCPA places enforcement obligations upon eight other federal

agencies for those organizations whose activities lie within their jurisdiction. These

agencies are the Office of the Comptroller of the Currency, the Federal Reserve Board,

the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National

Credit Union Administration, the Department of Transportation, and the United States

Department of Agriculture. These agencies have provided the Commission with a

description of their activities during the past year. Almost all of the organizations

regulated by these agencies are creditors and, as such, fall outside the coverage of the

Act. When these agencies receive complaints about debt collection firms that are not

under their jurisdiction, they generally forward them to the Commission.

The Office of the Comptroller of the Currency ("OCC") enforces compliance with the

FDCPA's provisions with respect to national banks. The OCC reports that its examination

of all national banks on a regular basis shows that there is a high level of compliance

with the Act.(32) No violations of the Act were discovered as a result of the OCC

examinations of national banks in 1996. The OCC also resolves complaints against

national banks. It resolved 800 complaints involving debt collection practices or tactics.

No violations of the Act were identified. It should be noted that very few national banks

engage in activities covered by the Act.

In the past year, the OCC continued to make available to all national banks copies of The

Comptroller's Handbook for Compliance, which explains the Act's provisions and details

instructions for determining compliance with the Act. The OCC also continued to

provide all national banks with copies of the Examiner's Guide to Consumer Compliance,

which similarly provides guidance as to compliance with the Act. The OCC's

Compliance Management Department also has a program of education and outreach to

promote compliance with the Act. During 1996, the Department's staff gave presentations

at numerous seminars and training sessions sponsored by national and state trade

associations and responded to questions and concerns regarding compliance with the

FDCPA.

The Federal Reserve Board ("FRB") enforces compliance with the FDCPA's provisions

with respect to member banks of the Federal Reserve System other than national banks.

The FRB continues to enforce the Act, as it applies to state member banks, through

regular compliance examinations. The FRB encountered no significant problems

enforcing the Act in 1996, and considers compliance with the Act by state member banks

to be satisfactory. A review of the 1996 Consumer Affairs examination reports submitted

to the FRB by January 30, 1997, revealed no violations of the Act. In 1996, the FRB

received twenty complaints alleging violations of the Act. Nine of the complaints were

against state banks. None of the nine complaints were subject to the Act because state

member banks collected only their own debts.

The FRB continues to distribute to interested parties the pamphlet entitled The Fair Debt

Collection Practices Act and to provide training regarding compliance with the Act in

consumer compliance schools. During 1996, the FRB did not issue any policy statements

or comments about the Act.

The Federal Deposit Insurance Corporation ("FDIC") enforces compliance with the

FDCPA's provisions with respect to banks (other than members of the Federal Reserve

System) whose deposits or accounts are insured by the FDIC. Examiners check for

compliance with the Act during the course of regular compliance examinations of
approximately 6,392 insured banks that are supervised by the FDIC. Individual

institutions are examined generally once every two or three years with an interim

evaluation at 12 or 18 months. Examiners provide information concerning the Act to

insured nonmember banks through the compliance examination process and make

themselves available for advice and guidance as to the requirements of the Act.

Based upon a review of compliance examination reports in 1996, the FDIC found that

none of the 1,924 compliance examination reports completed in 1996 cited any violations

of the Act.(33) During 1996, the FDIC made no changes to its FDCPA enforcement

methods and did not issue any new or revised policy statements. The FDIC encountered

no significant problems with enforcement of the FDCPA this year. The FDIC's Division

of Compliance and Consumer Affairs received 84 complaints in 1996 concerning the

debt collection practices of twenty-six different insured state-chartered nonmember

banks. In all cases, the banks involved were engaged in collecting their own debts or had

sold their loans to another entity and were not acting as debt collectors under the Act.

Eighty-two of the complaints dealt with primary allegations of harassment, including

calls to the debtors' place of employment, contacts at unusual times, and communication

with third parties, and two involved threats of repossession.

The Office of Thrift Supervision ("OTS") enforces compliance with the FDCPA with

respect to institutions subject to certain provisions of the Home Owners Loan Act of

1933, the National Housing Act, and the Federal Home Loan Bank Act. The OTS

employs highly trained examiners who conducted 551 compliance examinations in 1996.

No FDCPA violations were cited. During 1996, the volume of complaints received

regarding the Act was less than one percent of all complaints received for the year.

The OTS's Compliance Activities Handbook provides examiners with information and

specific guidance to conduct thorough compliance examinations covering the FDCPA as

well as other statutes. The OTS provides its publication, Compliance: A Self-Assessment

Guide, to savings associations to help the associations assess their compliance programs

and develop or improve internal policies to ensure compliance with consumer protection

laws and regulations. This publication is being revised to address, among other things,

the reforms enacted in the Economic Growth and Regulatory Paperwork Reduction Act

of 1996. Further, the OTS's two week Compliance I school includes discussion of the

FDCPA's requirements and instruction on how to examine for compliance with the Act.

The National Credit Union Administration ("NCUA") enforces compliance with the

FDCPA's provisions with respect to federal credit unions. The NCUA has delegated the

enforcement of the Act to six regional directors who supervise field examiners in

conducting on-site examinations of credit unions under its jurisdiction. The NCUA's

publication, Compliance: A Self-Assessment Guide, provides credit union officials with

information about the requirements of the Act. The NCUA found no FDCPA violations in

1996 and received no complaints of federal credit unions violating provisions of the Act.

In general, federal credit unions do not perform debt collection services for other credit

unions or lenders.

The Department of Transportation ("DOT") enforces compliance with the FDCPA's

provisions with respect to air carriers subject to the Federal Aviation Act of 1958. DOT

states that it has not received any complaints or initiated any enforcement proceedings

concerning the conduct of collection agencies or other persons whose principal business

is to collect debts owed or due to any air carriers. Air carriers collect their own debts and

are thus outside the scope of the provisions of the Act.
The United States Department of Agriculture ("USDA") enforces compliance with the

FDCPA's provisions with respect to any activities subject to the Packers and Stockyards

Act. The USDA reports that it has encountered no fact situations that fall within the

statutory provisions of the Act. Therefore, the USDA makes no specific observation,

suggestion, or recommendation regarding enforcement of or compliance with the Act.

CONCLUSION

The Commission believes that its efforts to monitor compliance and maintain a balanced

program of formal and informal enforcement of the FDCPA will continue to do much to

reduce consumer injury due to debt collection abuses as well as to encourage debt

collectors covered by the Act to use lawful debt collection methods.

By direction of the Commission.

Robert Pitofsky

Chairman

1. We cannot determine the extent to which abusive debt collection practices in general are represented by the

complaints the Commission receives. Based on our enforcement experience, we know that many consumers

never complain while others complain to the underlying creditor or to other enforcement agencies.

2. Public Law 95-109, former Section 803(6)(F).

3. H.R. Rep. No. 405, 99th Cong. 2d Sess. 3-6, reprinted in 1986 U.S. Code Cong. & Ad. News 1752, 1753-

57. "The purpose of the amendment was . . . to close a significant loophole, whereby attorneys engaging in

traditional debt collection activities were able to avoid the FDCPA's precepts merely by virtue of the fact that

they had, at some point, obtained a law degree." Firemen's Ins. Co. v. Keating, 753 F. Supp. 1137, 1142

(S.D.N.Y. 1990).

4. Green v. Hocking, 9 F.3d 18 (6th Cir. 1993); Fireman's Ins. Co. v. Keating, 753 F. Supp. 1137, 1142-43

(S.D.N.Y. 1990) (because a law firm initiating a legal proceeding to recover a debt cannot be deemed a "debt

collector" as defined by the FDCPA, the venue provisions of the FDCPA are inapplicable); National Union

Fire Ins. Co. v. Hartel, 741 F. Supp. 1139, 1141 (S.D.N.Y. 1990) (law firm representing a plaintiff guarantor of

notes executed by defendant investor in limited partnership is not a "debt collector" within the meaning of the

FDCPA because it has engaged in activities only of a purely legal nature in seeking reimbursement for

plaintiff).

5. See H.R. Rep. No. 99-405, 99th Cong. 1st Sess., 1-7, reprinted in 1986 U.S. Code Cong. & Ad. News 1752,

1753-57 (reflects purpose of amending the FDCPA to delete provision exempting "any attorney-at-law

collecting a debt as an attorney on behalf of and in the name of a client," designed to bring under the FDCPA's

coverage attorneys engaging in activities traditionally carried on by debt collectors); 131 Cong. Rec. H 10534

(1985) (Rep. Annunzio, sponsor of Amendment, stated that "[t]he removal of the attorney exemption will not

interfere with the practice of law by the Nation's attorneys. It will not prevent them from representing the

interests of their clients."); 132 Cong. Rec. H 10031 (1986) (three months after enactment of Amendment,

Rep. Annunzio stated that "[o]nly collection activities, not legal activities, are covered by the Act.... The Act

applies to attorneys when they are collecting debts, not when they are performing tasks of a legal nature....

The Act only regulates the conduct of debt collectors, it does not prevent creditors, through their attorneys,

from pursuing any legal remedies available to them.").

6. The Staff Commentary on the FDCPA states that an attorney whose activities are restricted to "legal"

activities (e.g., the filing and prosecution of lawsuits) is not a "debt collector" under Section 803(6) of the

FDCPA. Staff Commentary on the Fair Debt Collection Practices Act, comments 803(6)-1 and 2 (53 Fed.

Reg. 50097, 50102, Dec. 13, 1988).

7. Green v. Hocking, 9 F.3d 18, 21 (6th Cir. 1993).
8. "The term 'debt collector' means 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." Scott v.

Jones, 964 F.2d 314 (4th Cir. 1992); Fox v. Citicorp Credit Services, 15 F.3d 1507, 1512-13 (9th Cir. 1994).

9. Heintz v. Jenkins, 115 S. Ct. 1489 (1995).

10. Id. The Seventh Circuit in Jenkins v. Heintz, 25 F.3d 536, 539 (7th Cir. 1994), stated that "[t]here may be

abundant reasons why Congress should not regulate litigation aimed at collecting debts. But in drafting a

broad statute, Congress entered all areas inhabited by debt collectors, even litigation."

11. Pressley v. Capital Credit and Collection Services, 760 F.2d 922 (9th Cir. 1985).

12. Pipiles v. Credit Bureau of Lockport, 886 F.2d 22 (2d Cir. 1989).

13. Section 817 provides:

The Commission shall by regulation exempt from the requirements of this title any class of

debt collection practices within any State if the Commission determines that under the law of

that State that class of debt collection practices is subject to requirements substantially similar

to those imposed by this title, and that there is adequate provision for enforcement.

15 U.S.C. 1692o.

14. These regulations are codified at 16 C.F.R. Part 901 et seq.

15. Consent orders are for settlement purposes only and do not constitute an admission by the debt collector

that it violated the law.

16. United States v. National Financial Services, 820 F. Supp. 228 (D. Md. 1993).

17. United States v. National Financial Services, 98 F.3d 131 (4th Cir. 1996).

18. United States v. Trans-Continental Affiliates, Civil No. C95-1627 MMC (C.D. Cal. filed May 15, 1995).

19. United States v. G & L Financial Services, Civil No. 96-2178 (D.N.J. entered June 15, 1996).

20. United States v. United Creditors' Alliance, Civil No. SACV 96-861 GTL (EEx) (C.D. Cal. entered

September 23, 1996).

21. The United States District Court for the District of Arizona agreed with Lundgren in a private class action

suit brought by Sharolyn Charles against Lundgren and Check Rite, Ltd. and dismissed the complaint.

Plaintiff appealed to the Ninth Circuit where the appeal is still pending. The same issue is also awaiting

resolution in the Seventh Circuit (Bass v. Stolper, No. 95C 0470 (W.D. Wis.), appeal pending, No. 96-2113

(7th Cir.). Last year, the Commission filed briefs amicus curiae with both courts arguing, among other things,

that the plain language of the Act covers efforts by third parties to collect debts arising from dishonored

checks given by consumers in payment for goods and services.

22. United States v. National Financial Services, Inc., 98 F.3d 131 (4th Cir. 1996) aff'g 820 F. Supp. 228 (D.

Md. 1993).

23. Miller, 943 F.2d at 484; Swanson, 869 F.2d at 1225-26. Both the format and the substance of the letter

were held to "overshadow" the notice required by Section 809(a) in each case.

24. See also European Body Concepts, Inc., Docket No. C-3590 (June 23, 1995), Eggland's Best, Inc., Docket

No. C-3520 (Aug. 15, 1994), and Nutri/System, Inc., Docket No. C-3474 (Dec. 22, 1993).

25. "If the consumer disputes the validity of the debt within 30 days, the debt collector must cease collection

until he sends the consumer verification." S. Rep. No. 382, 95th Cong., 1st Sess. 4, reprinted in 1977 U.S.

Code Cong. & Ad. News 1695, 1699. A similar statement appears at page 8 of the Senate Report (1977 U.S.

Code Cong. & Ad. News at 1702).
26. Id.

27. The Graziano court also held that a threat to take any action within ten days would violate Section 807(5),

as well as Section 809, because it would be a threat to take an "action that cannot legally be taken." 950 F.2d

at 113.

28. 53 Fed. Reg. 50097, 50109; comment 809(b)-1 (Dec. 13, 1988).

29. Formal pleadings were specifically excepted from any disclosure requirements in the amendment to

Section 807(11).

30. 15 U.S.C. 1692a(6)(F)(iii).

31. The principal Senate Report on the final version of the FDCPA states that the intent was to exempt

"persons who service debts for others" from its coverage. S. Rep. No. 382, 95th Cong., 1st Sess. 7, reprinted

in 1977 U.S. Code Cong. & Ad. News 1695, 1701.

32. The OCC revised its compliance program to include examinations of all national banking companies

every 24 or 36 months depending on the size and complexity of the bank.

33. Only thirteen (13) insured state-chartered nonmember banks supervised by the FDIC were identified as

debt collectors subject to the Act.