Agency Examiner

September 1994


Earlier this year, Judy Hammond, President of Resource Management Services, Inc., interviewed David Medine and John LeFevre of the Federal Trade Commission (FTC). Mr. Medine is the Associate Director for Credit Practices and Mr. LeFevre is the Program Advisor for General Credit. Ms. Hammond's interview covered a wide range of collection issues with regard to the FTC, including compliance, selling of accounts and the investigative process, providing a three-part series of articles for THE AGENCY EXAMINER™.

This month's article will deal with Creditor Compliance. Parts 2 and 3 discuss Compliance Investigations and Selling Accounts.

HAMMOND - "Some creditors have expressed concern to us regarding their responsibility in ensuring agency compliance with the FDCPA. Any comments about that, particularly in the area of auditing agencies and what creditors should do?"

MEDINE - "I can tell you something on that issue and it relates to the American Family Publishers (AFP) case that the Federal Trade Commission brought a couple of years ago. This was our first case against a creditor; holding the creditor responsible for its debt collectors' conduct in situations where the creditor knew and approved of the debt collectors' misconduct or alleged misconduct.

For the record, that case was settled and there were no admissions of liability by AFP, but an order was entered against AFP based on the allegations and there was a settlement agreement.

The primary focus of the case was on the placement of accounts by AFP with a couple of collection agencies engaging in practices such as false threat of suit and false representation of attorney involvement. The settlement basically prohibited AFP from approving that conduct and, in fact, they were specifically directed to comply with the law and, my recollection is, to terminate collection agencies who they discovered were, in fact, engaged in those kind of practices.

So, this case really applies generally to the creditors' relationships with their collection agencies. To the extent that they know of and approve of misconduct the creditor can be held responsible. That's the principle of the AFP case.

In a sense, a creditor who refers accounts to a collection agency is probably more likely to find out about the misconduct than the creditor that sells the accounts because they have a closer ongoing relationship. I don't think it's uncommon, certainly in the dunning notice kind of collection practice, that there would be some dummy addresses included so that the creditor could review the frequency and nature of the notices.

It seems like a very good practice. It's an easy way to find out what's going on with your collection activity. Also, consumers who feel that the dunning notices they get are overbearing often send copies to the creditor and ask what's going on."

LEFEVRE - "Or they complain directly to the creditor."

MEDINE - "So, there are a lot of ways a creditor can find out about what's going on and that's when their responsibility really kicks in, in terms of deciding whether to continue doing business with that collector or to direct the collector to change their practices. Our position is: if creditors get to the stage where they know that the collection agency is engaging in illegal conduct and (the creditor) is essentially approving it, then creditors have an obligation to terminate the relationship with the agency."

HAMMOND - "And 'knowing' is the key word that needs to be defined?"

MEDINE - "Right, and that's going to vary from situation to situation."

HAMMOND - "So, if you get a complaint from a debtor, it doesn't mean that you know the agency did it. It just means that one debtor complained about it. So it has to be checked out."

LEFEVRE - "Usually, as in the AFP situation, it has to do with misrepresentations in written communication. Those are sent out en masse, so all you need is one. If you're talking oral harassment over the phone, one collector could do it. It's against the collection agency policy, but one still strays. That would be harder to (blame on) the creditor."

HAMMOND - "Even at your best agencies that can happen."

MEDINE - "And obviously that is going to depend on the number and frequency of the complaints that you get. But there also may be representations that you become aware of like, "We're going to sue you" and you know that, as a practice, you never authorize suit on your accounts. Well, that's a situation where misrepresentation is clearly taking place and you're clearly aware of it. You have a real responsibility to deal with that.

HAMMOND - "That brings up a good example. I was talking with a banker recently who told me he never sues any accounts. So, I asked him if he tells all his agencies never to threaten legal and he said 'No, we like them to use that threat as a collection tool.' "

LEFEVRE - "That would be a nice case!"

HAMMOND - "But you wouldn't take that case because banks are not under the FTC's jurisdiction?"

MEDINE - "We would take it against the collection agency. The collection agency is under our jurisdiction. And if the collection agency is doing that, knowing that the bank's policy is to never sue, then clearly they are in violation of FDCPA. If the creditor has a corporate policy of never filing suit and knows that its agency is threatening suit, our position is that the creditor is liable and responsible for that conduct."

HAMMOND - "What about a huge agency that gets 50,000 accounts a week and sues only 20 accounts in a month. Is the number of suits so small and insignificant or would that be an issue for you?"

LEFEVRE - "It depends on the nature of the threat. Some collectors say: 'If you don't pay, we're going to sue you tomorrow.' Period. Some say: 'If you don't pay, we may consider the possibility of legal action in the future. Or we may recommend it to our clients.' As the threat gets stronger, the burden gets larger. So, if you say you're going to sue tomorrow, it's our position that you better have done it in the past and do it on a regular basis. If you say you may sue, our position is that there is a reasonable likelihood. If you never sue and you imply that there is a good possibility that somebody could be sued, then that's deceptive too. So it all depends on the nature of the threat and what they actually do."

MEDINE - "What's important for collection agencies to understand - and creditors too - is just because there is a nice employee manual sitting in the back gathering dust doesn't mean that there is a basis for confidence that you are not subject to an enforcement action. You have to really monitor the collection agencies and the collectors themselves to see what is going on. You can't just be confident that because, on that first day of work, you told them to comply with the law, that you can rest easy. There are clearly incentives, in the way the industry is set up, to push hard to collect. The commission system is clearly directed in that way and that makes it all the more important that the companies diligently supervise their collection agencies. Again, that's not to say, that most aren't complying with the law. I think it's fair to say most collectors are complying with the law. It's been a very effective law, with a high degree of compliance, but that doesn't mean that there isn't a constant need for vigilance to insure that all your agencies are complying."

HAMMOND - "Would you have any recommendations for creditors: things that creditors, in your opinion, should be doing with their agency, back to that "if they know" idea and how proactive they should be in that regard?"

MEDINE - "We can give you some tips as a policy matter, but that's separate from what will make them legally responsible. It would be prudent for a creditor to monitor their collection activities and to give the collection agencies appropriate guidance if they stray from the law. Also, if the creditor concludes that the agency is violating the law and the agency refuses to change its ways, the creditor (and again, we're talking a mixture of policy and law), should terminate that collection agency as an ultimate remedy. I would say this is an extreme step to take but it's an appropriate step to take if the agency refuses to comply with the law."

LEFEVRE - "There have been times, and I guess I shouldn't mention anything specific, where creditors were shopping around for collection agencies who will violate the law because it increases their recovery percentage, and, of course, that's bad news as far as we're concerned. We would have no trouble, in that case, saying they (the creditors) are responsible."

MEDINE - "I assume it is not at all uncommon for creditors to very closely monitor their collection agencies and play them off against each other in a very competitive fashion, and there's nothing wrong with that. The problem comes if the creditor suggests that Agency A is doing better than Agency B because Agency A is engaged in practices which are illegal. Then they are in trouble. Then they are clearly involved in illegal activities by encouraging it".

HAMMOND - "We do suggest, to creditors, that they need to know as much as possible about how the agency runs its business for all kinds of reasons. One would be this issue of liability. So, I thank you for taking the time to talk with us about the FTC."

MEDINE - "Well, this has been in our interest, too. Our goal is compliance and obviously, it's a lot more efficient for us if there is voluntary compliance. One of the lessons of the AFP case is that creditors have a role in compliance as well.

Compliance Investigations

HAMMOND - "How do you learn about the agencies that you eventually investigate? From consumer complaints?"

MEDINE - "Investigations are triggered by a number of things. We may get consumer complaints. We may just decide to look into a company's practices. Or a competitor may contact us, and that's not uncommon in this industry, because they say, 'Look, we're playing by the rules, we follow the law, we don't make false threats, we don't make third party contacts, but our competition does and they're stealing accounts from us and you ought to look into them.' That happens not infrequently. So any of those things could trigger an investigation. Once we open an investigation, we're going to contact the company directly and get information from them. We contact consumers and former employees and get a picture of what the company's practices are."

HAMMOND - "How is it normally processed?"

MEDINE - "We investigate a case and because civil penalties are obtainable under the FDCPA, the law requires that the Federal Trade Commission give the Department of Justice first crack at the case. They have 45 days to decide to accept the case or not. It's fair to say they typically accept the cases that we refer to them. If they were to decline the case, the law would allow the FTC to file the case itself, so the DOJ can't kill the case, they simply have first choice in bringing the case themselves.

HAMMOND - "Is that what happened to the American Family Publishers case?"

MEDINE - "Well, that wasn't brought under the FDCPA, because creditors are not covered under the FDCPA. That was directly under the Federal Trade Commission Act with allegations that they were engaged in aiding and abetting unfair and deceptive trade practices. That was brought as an administrative case and was assigned to an Administrative Law Judge (ALJ) to hear. Ultimately they would have a right to appeal to the full FTC in the U.S. Court of Appeals. So we proceed on different tracks - the administrative cases go before an ALJ and then to the Commission and the Commission sits as a judge. If civil penalty is sought, it goes to Federal District Court either through the Justice Department or by ourselves. The easy answer is, most cases against creditors are brought by the Justice Department in Federal District Court. I don't know of any that haven't been."

LEFEVRE - "Because of the penalty. We want the option of getting it."

HAMMOND - "Are most of the cases settled, so there is no admission of guilt?"

MEDINE - "Yes. We've had a few litigated cases, but most of them settle. We've had cases that were close to trial and then settled. We've had cases that settled early on and we've had cases that have gone through the whole process up through trial and the judge entered a ruling and so it can go any of those directions.

HAMMOND - So, the cases under the FDCPA would have to be against agencies, but a case against a creditor would have to be under the FTC.

MEDINE - "Yes. The FTC could still bring the case in Federal District Court as well in our own name, but that complicates the situation. We basically proceed either in Federal District Court or administratively for Federal Trade Commission Act violations. We basically proceed only in Federal District Court for collector violations under the Debt Collection Act."

HAMMOND - "How big is your staff?"

MEDINE - "We have a total staff of about 30 people including support staff."

HAMMOND - "So they would handle all the possible cases you might want to do? And the investigations?"

MEDINE - "Right, in addition to Fair Credit Reporting enforcement, Truth and Lending enforcement, Equal Credit Opportunity enforcement, and some fraud enforcement. We've brought major cases against TRW and Trans Union in the past. We've also brought discrimination cases. We recently had a million dollar settlement against Charlotte Mortgage for racial discrimination.

HAMMOND - "How long would an investigation normally take? Let's assume you got several complaints and you believe there is a problem. What are the steps of an investigation?"

MEDINE - "I don't want to go into too much detail because we want to preserve our investigative domain, but it can really vary depending on the size of the company, the nature of the violation, the number of violations, and the nature of the evidence that we have going into it. There's really no simple answer. An investigation could take a few months, it could take a few years depending on the issues involved."

LEFEVRE - "It's resource-intensive. You have to talk to a lot of people."

HAMMOND - "Do you just show up at the agencies as the Federal Trade Commission?"

MEDINE - "We'll send a letter, unlike scams where we try not to let them know we're investigating them until we go to court. Collectors are businesses, they're around, they're going to be around, and we have no qualms about contacting them up front and saying we're looking into your practices, you're under investigation, and this is the information we need from you to make a determination of whether you're violating the law or not."

LEFEVRE - "Usually, in the debt collection industry, it's practices not policy. In other words, the cases where we want to (investigate) without telling them (who we are) are cases where the policies are clearly in violation. We don't want them to surreptitiously change the policy out from under us so that we look like we don't know what we're doing. But with collectors, it's practices. The policies are, most of the time, pristine - right out of the American Collectors Association manual: "We don't do this, We don't do this". It's what they actually do that we have to investigate."

HAMMOND - "We talked earlier about dummy accounts being placed to track agency activity. Do you have the facility to, say, be a dummy account for a creditor?"

MEDINE - "Again, I don't want to tip our hand on how we proceed, but there are a variety of ways that we can find out about collector practices. We also have very broad investigative powers."

HAMMOND - "So you can do sting operations?"

MEDINE - "Sure, we do sting operations. We've gone through people's trash. We also have the power, once we start investigating, to take testimony under oath and, with the authority of the courts behind us, to obtain documents during the investigation even before we go to court. So we have a fairly good ability to find out what's going on."

HAMMOND - Is the fact that someone is being investigated public information?"

MEDINE - "No. The investigations are not public and the information submitted to us in those investigation is not public. We go to great pains to keep our investigations nonpublic, because many times we will investigate a company and close the investigation because we found no wrongdoing and we wouldn't want the company to be publicly tainted with the notion that we were investigating them and (leave) some suggestion that there was wrongdoing. So we are very careful not to discuss our investigations publicly. And the only time that we discuss them is when they are public, and that is when the Commission works out a claim or a settlement.

HAMMOND - "Do you end up investigating a lot of people that you don't file a claim against?"

MEDINE - " Some. Obviously we like to target companies that have a high probability that there are law violations taking place, and I think that we do a fairly good job at that, but there are occasions, that after investigating, we conclude that there are no law violations. And after we make that conclusion, we have no problem with closing the case. That's the end of it and we move on to another case. I would say that, more often than not, if we open an investigation, it will go through to conclusion because we've made a good judgment on which companies to investigate. Again, just because we open an investigation, does not mean there has been any wrong doing".

HAMMOND - "And, an investigation could take a long time before you are ready to proceed?"

MEDINE - "It could be months, it could be years. It depends on a lot of things - how far the focus is, how cooperative the company is in the investigation. Yes, it could take a long time. But that's because we want to be comfortable in any given case that there has been a reason to believe that there is a law violation before we bring an action. It's a serious matter to bring an action and we want to have the evidence, basically, of the violation before we do that."

Selling Accounts

HAMMOND -- "Does the Federal Trade Commission have a position on the creditors' responsibility when they sell accounts?"

MEDINE -- "The American Family Publishers (AFP) case that the Federal Trade Commission brought a couple of years ago was our first case against a creditor, holding the creditor responsible for its debt collectors' conduct in situations where the creditor allegedly knew and approved of the debt collectors' misconduct. For the record, that case was settled and there were no admissions of liability by AFP, but an order was entered against AFP based on the allegations and there was a settlement agreement.

The primary focus of the case was on the placement of accounts by AFP with a couple of collectors engaging in practices such as false threats of suit and false representation of attorney involvement. The settlement basically prohibited AFP from approving that conduct and, in fact, they were to specifically direct their collectors to comply with the law and to terminate collectors who they discovered were in fact engaged in those kind of practices.

But there was another aspect of the settlement which dealt with the sale of accounts as opposed to referral of accounts. Generally speaking, what it encompassed was making sure that AFP, through the sale of its accounts, did not encourage collectors to engage in illegal conduct. AFP had to do a little bit of checking on the collectors they were selling their accounts to and make sure that, in the selling of the accounts, they did not somehow encourage illegal activities to take place. It's what we call "fencing in:" something that is not directly related to the specific allegations of the complaint but added as a provision to make sure that the company does not engage in new practices that might subvert the intent of the order or the intent of the statute.

So here they are with the order not to refer accounts to accomplish certain ends and to prevent a situation where they might say, 'Aha, if we just sell the accounts, then we can avoid the order'. This is the kind of provision that is put into the order to make sure that there is general compliance with the law and AFP obviously agreed to the entry of this provision. It covers both the referral and sale of accounts."

HAMMOND -- "Let's talk about creditor responsibility. Suppose a major creditor (and not a bank -- because you have no jurisdiction over banks) wants to sell a huge portfolio. What is their responsibility to know who they sell to?"

MEDINE -- "Their responsibility would be primarily not using that sale as a way of knowingly encouraging or approving of illegal conduct by collectors. For example, if they, and this may be a little extreme, but if they were to shop around for collectors and say, 'Let's find some collectors who violate the law and make sure we always sell our accounts to those people because we know they pay top dollar because they can collect more if they violate the law.' In other words, your question might be, 'What would a creditor care if the collector violates the law?'. The answer is: presumably, your accounts are worth more to people if violating (the FDCPA Act) makes them more valuable.

So, to the extent that a creditor is aware of the fact that the people they are selling to are paying top dollar because they are violating the law and you know that and you continue to engage in that practice, you could be said to be providing them with the 'means and instrumentalities', that is, by providing them with these accounts you are providing them with the means by which they can violate the law."

HAMMOND -- "So if I am a creditor, I at least have some level of due diligence to conduct on whomever I sell my accounts to."

MEDINE -- "As a legal matter, that's difficult to say. As a policy matter, the ideal situation would be that the creditor would sell to the party that the creditor believes is going to act most appropriately or properly. The biggest problem comes when the creditor knows about and approves of the illegal conduct or somehow furthers it. A degree of diligence is a wise practice for a creditor. I wouldn't go as far as to say it's required by law. It's a good preventative measure because if you, over time, find out about some of these practices without having done a thorough review, you may get in trouble when you may have been able to prevent that problem by doing due diligence up front."

LEFEVRE -- "In the AFP case, there was a situation where the company allegedly came very close to suggesting that the collectors to whom they referred accounts (and sales would be similar to referrals) violate the law. In other words, AFP saw papers that indicated that the collector AFP hired was doing something that violated the law and acquiesced in the violations. In the sales situation, such acquiescence in order to induce the sale would be troublesome."

MEDINE -- "Knowledge of the conduct that's going on and continuing sales is also very troublesome." HAMMOND -- "And then you have the next question. If you know the person you sell to has their accounts serviced at a place you are not comfortable with, then how far do you need to go if you know that it's their practice to rebundle and resell some of their things?"

MEDINE -- "So, we're assuming there is some misconduct at the end of the line and the issue is how far removed you are from the misconduct and to what degree you are controlling the accounts getting to the entity that is engaging in the misconduct. I don't think we can tell you when you're going to cross the fine line.

The issue is: how much control do you have over the accounts being ultimately placed with an entity that's engaged in misconduct and how aware are you of that misconduct?"

HAMMOND -- "I want to thank you both for taking time to talk to our readers. You've answered some important creditor questions and offered some valuable insights."