Debt collectors now risk liability under the Fair Debt Collection Practices Act (FDCPA) for even reasonable mistakes of law as a result of the U.S. Supreme Court decision this week in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA.
The Court ruled on April 21, 2010, that the FDCPA's "bona fide error" defense does not apply to a violation of the Act resulting from a debt collector's incorrect interpretation of the statute’s requirements.
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 Sixth Circuit, whose decision the Supreme Court reversed, held 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.
The Supreme Court concluded that a legal mistake could be considered "intentional" under the FDCPA even if a debt collector did not know that its conduct violated the law. The Court refused to give interpretative weight to the law firm's argument that Congress' amendment of the Truth in Lending Act's bona fide error defense to expressly exclude legal mistakes evidenced its intent for such mistakes to be bona fide errors under the FDCPA.
Jerman means that good faith reliance on advice from legal counsel will not shield debt collectors from FDCPA liability. The decision also means that legal mistakes will not be a defense against violations of other federal consumer protection statutes, such as the Electronic Fund Transfer Act, Expedited Funds Availability Act, and Real Estate Settlement Procedures Act—all of which contain "bona fide error" provisions that do not expressly exclude legal mistakes.
These risks underscore the need for debt collectors and others subject to such potential liability to select legal counsel with the experience necessary to provide sophisticated consumer compliance advice.
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 kaplinsky@ballardspahr.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com.
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