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UNITED STATES OF AMERICA

FEDERAL TRADE COMMISSION

WASHINGTON, D.C. 20580

Office of the Chairman

March 17, 1997

The Honorable Newt Gingrich

The Speaker of the House of Representatives

Washington, D.C. 20515

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

Practices Act

Dear Mr. Speaker:

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-at-law" 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 re-examine 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.