March 29, 2017

FTC Requires Substantiation to Support Debt Collection Communications

3 min

With all eyes on the CFPB and its future fate, it's easy to overlook the FTC's activities in the consumer financial services world – and that would be a mistake. The FTC continues to share enforcement jurisdiction with the CFPB over many industries, including consumer lending by non-banks, credit reporting, and debt collection.

Last week, the FTC announced a settlement with a Texas-based debt collection agency and two of its principals relating to collection of what the FTC categorized as "municipal debt" (court fines, traffic tickets, parking citations, and fines) and certain types of "consumer debt" (specifically, debts relating to utilities, emergency medical services, and other city services). The settlement provides insight into the FTC's view of it authority over municipal debt and consumer debt under the scope of the FTC Act and the FDCPA, and what constitutes adequate substantiation in debt collection communications.

The core allegations in the complaint relate to the company's collection letters, which, according to the FTC, deceptively threatened arrest. Specifically, the FTC concluded that:

  1. It was deceptive to threaten consumers that warrants could be issued if they failed to respond to the notice, where warrants had not yet been issued for those consumers and the company had no additional information concerning the issuance of warrants.
  2. Where the municipality informed the company that warrants may have been issued or no information about warrants was provided, it also was deceptive to send letters threatening that failure to respond to the notice "could result in warrants being issued for your arrest and your driver's license being suspended."
  3. Where the municipality informed the company that warrants were issued to collect the court-imposed municipal debts, it was deceptive to represent that the municipality planned to enforce the warrants.

Interestingly, the FTC alleged these specific practices, which were used to collect municipal debts, violated the FTC Act—and not the Fair Debt Collections Practices Act (FDCPA)—seemingly acknowledging that the municipal debts subject to the collections—fines, traffic tickets, parking citations—are not "consumer debts." The classification of debts stemming from parking tickets, unpaid tolls, and similar citations has been the subject of recent civil litigation. Most recently, on March 24, a federal court in New Jersey dismissed a class action against a collector of unpaid E-ZPass tolls and penalties on the grounds that they did not arise from a consumer transaction primarily for personal, family, or household purposes, as required to be subject to the FDCPA. Thomas E. St. Pierre v. Retrieval-Masters Creditors Bureau, Inc., No. 3:15-cv-02596 (D.N.J. Mar. 24, 2017).

The broader takeaway of the case, however, relates to the concept of substantiation. The FTC appears to take the position that debt collectors may not threaten any action unless it is reasonably certain the specific account has been screened for and qualified for that given action and it is reasonably certain that the collector or owner of the account will pursue that action for the given account. Simply knowing that the account is eligible for such action and qualifying the message so that it does not suggest that the action definitely will be taken (by using "could" or "may," for example) is not sufficient. While not out of step with recent CFPB and FTC enforcement precedent on what constitutes a reasonable basis for making debt collection claims, the examples included in the Complaint regarding the specific claims and accounts at issue show a real-world application of an abstract legal concept.

Related Articles and Presentations

Navigating the New Federal & State Debt Collection Enforcement Landscape

CFPB Continues to Build Case for Planned Debt Collection Rules

Debt Collection Rulemaking: Proposal Highlights and Key Dates