Ethical Issues in Collection
A. Aggressive Collection Practices
IRS seizure actions sometimes resemble hostage taking. On November 28, 1984, IRS agents raided the Engleworld Learning Center in the Detroit suburb of Allen Park, Michigan, because of overdue taxes. The IRS agents then set up a creative scheme to force parents to pay the center’s taxes when they came to pick up their children. As the Washington Times reported:
“Inside the Learning Center were a handful of bewildered parents, unable even to see their children until they paid money for taxes they did not owe to two IRS agents sitting near the entrance. Allegedly, the children – as many as 30 of them – could not run to greet their parents…as ordinarily was their custom. IRS agents kept them closely guarded in Room C of the day-care center. At least one agent was posted in another room where pre-schoolers, some still in diapers, were detained.”
Sue Stoia, a parent of one of the children, observed: “It was like something out of a police state. They indicated you could not take your child out of the building until you had settled your debt with the school, and you did that by signing a form to pay the IRS. What we were facing was a hostage-type situation. They were using children as collateral.” Engleworld director Marilyn Derby said, “Parents were not allowed to see their children until they had signed an agreement with the IRS. It was a very scary situation, like the Gestapo was here. Children were crying, parents were trembling. I told one woman whose hands were shaking that she shouldn’t sign anything she didn’t want to. She signed anyway.
Leaving this extreme situation aside, many people are familiar with “war stories” of the extreme measures taken by debt collectors to extract money from debtors.
Aside from the remedies granted under the Fair Debt Collection Practices Act (FDCPA), there are other various tort and criminal grounds that someone may pursue against an aggressive debt collector:
- False imprisonment or false arrest.
- Conversion/wrongful levy or attachment.
- Slander of title.
- Assault and battery. Most collectors know better than to make personal appearances at a debtor’s home or workplace.
- Intentional or negligent infliction of emotional distress. The general elements of such a cause of action are: conduct that is either intentional or reckless; outrageous or unreasonable; undertaken without a legal privilege; with the proximate causing of severe mental distress. Many cases under this cause of action are derived from a series of otherwise reasonable contacts that become unreasonable when a lot of them are made within a very short period of time. No doubt, many times people file for bankruptcy protection it is as much to end the ceaseless collection calls as it is to discharge debts.
- Invasion of privacy (highly intrusive conduct – cyberspace issues)
- Interference with business or contractual relationships. This may include prospective economic relations, including employment.
- Defamation. This includes false statements (Fair Credit Reporting Act may control false marks on credit report).
- Abuse of process (such as filing a baseless lis pendens or lien)
It is important to note that the FDCPA does not preempt other claims that a debtor may have against a debt collector.
B. Unauthorized Practice of Law
In New York, Judicial Law §489 prohibits a collector from taking an assignment of a debt solely for the purpose of pursuing a law suit (champerty).
Unethical conduct of collection attorneys may put them at exposure for grievances for unauthorized practice of law, including:
- Allowing collection employees to act in the attorney’s name
- Routinely signing pleadings and other documents prepared by attorneys not licensed to practice in the State
- Designing demand letters or other correspondence to simulate legal process
- Threatening criminal prosecution in an attempt to collect a debt
- Harassment to collect the law firm’s debt, including threatening to reveal the client’s secrets
C. Reporting Professional Misconduct
The New York State Attorney General brought suit against all of the major debt collection firms for entering default judgments based upon one process service agency’s affidavits, which turned out to be predominantly ‘sewer service.’ According to the lawsuit, 37 debt collection firms relied upon affidavits of service from American Legal Process, who apparently failed to properly serve the Summonses; this put debtors in the position of having to bring Orders to Show Cause to vacate their defaults. In the case, the court vacated over 100,000 default judgments.
New York City recently enacted new rules governing process service which will affect every area of the law but especially debt collection because so many cases are filed and wind up with the default judgments.
There is the availability of an action under General Business Law Section 349, which is New York’s version of the Unfair and Deceptive Trade Practices case.
D. Communication with Parties and Disclosure Issues
In communicating with other parties and disclosing information relating to a debt or consumer account, there are also various other statutes and rules that govern the communications and disclosures required, including:
- The Fair Credit Reporting Act (FCRA). This Act regulates the dissemination of credit reports and reporting of credit information. These days, given the prevalence of financial institutions relying upon ‘credit scoring’ one’s credit report is more important than ever. Ensuring accuracy is very important. Viewing information is regulated under the FCRA.
- The Driver’s Privacy Protection Act (DPPA). This Act works to restrict disclosure of information by the various state Department of Motor Vehicles offices.
- The Telephone Consumer Protection Act. Among the protections afforded to debtors under the TCPA, there is a prohibition on the use of auto-dialers to known cellular phones without the consumer’s prior written consent. Hand-in-hand is the Truth in Caller ID Act which prohibits the transmission of misleading or inaccurate caller ID with the intent to defraud, cause harm or wrongfully obtain anything of value. Therefore, it is important to (a) check documentation to see if there is written consent from the consumer to contact him on his cell phone; scrub telephone numbers for those with cell phones and those with land lines; and review telephone call collection procedures.
- Gramm-Leach-Bliley Act (GLB): In 1933, Congress enacted the Glass-Steagall Act to prohibit banks, investment houses and insurance companies from acting in combination. The GLB repealed this law, creating the ability, for example for Citibank, Smith Barney and Travelers to merge. Aside from this aspect, the GLB is also known to consumers today because it imposes upon financial institutions the duty to notify consumers of their privacy rights concerning their data. The GLB requires those institutions to inform consumers as to how their information is collected, used and kept protected. The Safeguards Rule requires institutions to develop an information security plan.
- Health Insurance Portability and Accountability Act (HIPAA): Congress enacted the law to provide, among other things, confidentiality in a patient’s health care information.
- NYC Administrative Code: Title 20 – Consumer Affairs, Chapter 2.
- Various states have adopted rules that debt buyers must have proof of original receipts/contract before even making a telephone call to the debtor to collect a debt.
- Documentation generally provided to debt buyers are address and social security number; amount due, last payment and charge-off dates; and possibly monthly account statements. Where will the future of this multi-billion dollar industry be? Will there be no debt buyers? Will credit card companies retain their own charged-off debts? Will documentation be more amply supplied by the credit card companies, with availability of witnesses and admissible evidence? How will technology deal with these issues?
E. Hey! Someone pulled my credit report!
It is no secret that the crime of identity fraud is one of the most prevalent crimes today, which both the federal government and state governments are attempting to prevent and prosecute. Identity fraud is the intentional taking of a person’s identity for purposes of defrauding either that person of his/her property or the property of others through applying for credit in that person’s name.
As our society has become more and more dependent upon credit reports for all types of determinations regarding financial obligations, there has been an increased need to ensure that credit reports are not accessed for impermissible purposes, especially including those who are viewing the reports to elicit information to commit these crimes. The Fair Credit Reporting Act (FCRA), codified in Title 15 of the United States Code, is a federal act designed to restrict access to one’s credit reports for several permissible reasons; if there is not a permissible purpose, then the one accessing the report may be subject to governmental penalties and civil liability.
Section 1681b(a) of FCRA provides: [A]ny consumer reporting agency may furnish a consumer report under the following circumstances and no other:
(1) In response to the order of a court having jurisdiction to issue such an order, or a subpoena issued in connection with proceedings before a Federal grand jury.
(2) In accordance with the written instructions of the consumer to whom it relates.
(3) To a person which it has reason to believe—
(A) intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer; or
(B) intends to use the information for employment purposes; or
(C) intends to use the information in connection with the underwriting of insurance involving the consumer; or
(D) intends to use the information in connection with a determination of the consumer’s eligibility for a license or other benefit granted by a governmental instrumentality required by law to consider an applicant’s financial responsibility or status; or
(E) intends to use the information, as a potential investor or servicer, or current insurer, in connection with a valuation of, or an assessment of the credit or prepayment risks associated with, an existing credit obligation; or
(F) otherwise has a legitimate business need for the information—
(i) in connection with a business transaction that is initiated by the consumer; or
(ii) to review an account to determine whether the consumer continues to meet the terms of the account.
(4) In response to a request by the head of a State or local child support enforcement agency (or a State or local government official authorized by the head of such an agency), if the person making the request certifies to the consumer reporting agency that—
(A) the consumer report is needed for the purpose of establishing an individual’s capacity to make child support payments or determining the appropriate level of such payments;
(B) the paternity of the consumer for the child to which the obligation relates has been established or acknowledged by the consumer in accordance with State laws under which the obligation arises (if required by those laws);
(C) the person has provided at least 10 days’ prior notice to the consumer whose report is requested, by certified or registered mail to the last known address of the consumer, that the report will be requested; and
(D) the consumer report will be kept confidential, will be used solely for a purpose described in subparagraph (A), and will not be used in connection with any other civil, administrative, or criminal proceeding, or for any other purpose.
(5) To an agency administering a State plan under section 654 of title 42 for use to set an initial or modified child support award.
If the person who accesses a consumer’s credit report does not have a permissible purpose for accessing the same, there are potential civil liabilities, which depend upon whether the person accessed the credit report intentionally or negligently.
If the person did so willfully or intentionally, then the civil liabilities may be:
Section 1681n: Any person who willfully fails to comply with any requirement imposed under this subchapter with respect to any consumer is liable to that consumer in an amount equal to the sum of—
(A) any actual damages sustained by the consumer as a result of the failure or damages of not less than $100 and not more than $1,000; or
(B) in the case of liability of a natural person for obtaining a consumer report under false pretenses or knowingly without a permissible purpose, actual damages sustained by the consumer as a result of the failure or $1,000, whichever is greater;
(2) such amount of punitive damages as the court may allow; and
(3) in the case of any successful action to enforce any liability under this section, the costs of the action together with reasonable attorney’s fees as determined by the court.
If the person did so negligently, then the civil liabilities may be:
Section 1681o: Any person who is negligent in failing to comply with any requirement imposed under this subchapter with respect to any consumer is liable to that consumer in an amount equal to the sum of—
(1) any actual damages sustained by the consumer as a result of the failure; and
(2) in the case of any successful action to enforce any liability under this section, the costs of the action together with reasonable attorney’s fees as determined by the court.