The country's debt collection system stands at the center of much attention by courts and regulatory agencies. In recent developments:

  • The Federal Trade Commission has opposed the ruling that an error of law provides a defense under the Fair Debt Collection Practices Act in an amicus brief filed with the U.S. Supreme Court.
  • The Government Accountability Office has recommended that the FDCPA be updated to address the use of such technologies as cell phones and e-mail in debt collection.
  • The FTC has recommended an overhaul of the debt collection regulatory system.

"Bona Fide Error" Defense

The FTC has filed an amicus brief urging the U.S. Supreme Court to reverse a decision of the U.S. Court Appeals for the Sixth Circuit holding that an error of law qualifies for the "bona fide error" defense in the Fair Debt Collection Practices Act. That defense shields a debt collector from civil liability in a private action if it shows that an FDCPA violation "was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error."

The Supreme Court agreed in June 2009 to review the Sixth Circuit’s decision in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA to resolve a split in the circuits. Should the Supreme Court find that the defense is not applicable, debt collectors will be at risk of being held liable for even reasonable mistakes of law. Regulatory interpretations of "bona fide" error provisions in other federal consumer protection statutes might also be called into question.

The Sixth Circuit ruled that the "bona fide error" defense covered a law firm’s mistake of stating in a validation notice that the consumer was required to dispute the debt in writing. (A majority of courts have held that the FDCPA allows a consumer to dispute a debt orally.) However, the FTC brief argues that an FDCPA violation should be considered "intentional," even if the debt collector did not intend to violate the law, so long as the collector intended to take the action that resulted in the violation (in this case, to include a written-dispute requirement in a validation notice).

The FTC brief further argues that there are no "procedures reasonably adapted" to avoid "any" legal error because legal research and analysis do not comprise a "procedure" that, if followed, can avert misinterpretation or misapplication of the FDCPA.

The FTC acknowledges that the FDCPA's "bona fide error" provision is based on a similar Truth in Lending Act provision, later amended to expressly exclude legal mistakes, but argues that the TILA amendment should not be read to mean that Congress intended such mistakes to be bona fide errors under the FDCPA. The FTC also notes in its brief that "bona fide error"provisions in other federal consumer protection statutes that do not expressly exclude legal mistakes—such as the Electronic Funds Transfer Act and the Real Estate Settlement Procedures Act—have been interpreted by the Federal Reserve Board or the U.S. Department of Housing and Urban Development to not encompass such mistakes. A decision by the U.S. Supreme Court affirming the Sixth Circuit's ruling could cast doubt on the continued validity of those regulatory interpretations.

GAO Report

The GAO, on October 21, 2009, released a report on credit card debt collection prepared at the request of the Senate Subcommittee on Investigations, within the Committee on Homeland Security & Governmental Affairs. The report describes the use of internal and third-party collectors by card issuers and the operation of the debt-buying industry.

The GAO looked at various collection practices that raise concerns, including the prevalence of default judgments in debt collection litigation and the inadequate verification of debts by collection agencies and debt buyers who often have insufficient information about the accounts they are collecting.

Most notable is the report's discussion of the compliance challenges faced by debt collectors when using technologies such as mobile telephones, e-mail, caller identification, and fax machines. The GAO recommends that the FDCPA be updated to address those technologies and that the FTC be given rulemaking authority allowing it to provide FDCPA guidance on which debt collectors can rely.  

FTC Seeks Modernization

The FTC issued a report in February 2009 recommending modernization of the nation’s debt collection regulatory system. As a follow-up to the report, the FTC launched a series of regional roundtable discussions to help develop policy recommendations for consumer debt collection litigation and arbitration.

At the first roundtable, held in August 2009 in Chicago, Alan S. Kaplinsky, Chair of Ballard Spahr's Consumer Financial Services Group, gave a presentation on pre-dispute arbitration agreements. Click here for details on that first roundtable. The final roundtable is scheduled next month in Washington, D.C.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or; John L. Culhane, Jr., 215.864.8535 or; Barbara S. Mishkin, 215.864.8528 or; or Mark J. Furletti, 215.864.8138 or

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