Case Law Important to the Check Industry

Published: July 01, 2007

While we have one FDCPA that applies nationwide, absent the United States Supreme Court advising us of what it means, interpretations regarding the required notices and authorizations is left to the various Circuit Courts of Appeal and District Courts in the United States.

Many of you will remember a case from last year dealing with the requirement under the NACHA Rules that the authorization for an electronic funds transfer (EFT) must be in writing, notwithstanding the fact that under Reg "E" the authorization may be based upon a post–notice implied contract. That case, Volden v. Innovative Financial Systems, Inc, 440 F.3d 947 (8th Cir. 2006), addressed a broader set of issues facing debt collectors, as well as highlighting the differences that exist between the various Circuits. While the Fair Debt Collection Practices Act (FDCPA) applies nationwide, absent the U.S. Supreme Court advising us of what it means, such interpretation is left to the various Circuit Courts of Appeal covering different regions of the United States.

The first issue addressed was whether the failure to obtain a written authorization from the consumer to initiate an EFT for the check dishonor fee was a violation of the FDCPA. The consumer first contended that initiating an EFT without a written authorization would be a "false, deceptive, or misleading representation or means in connection with the collection of any debt." (15 U.S.C. Section 1692e). This misrepresentation would "exist" because a debt collector initiating an EFT through the ACH has agreed (under the terms of its contract with the ACH service provider) to comply with all rules of the ACH at the time each entry is initiated. Further, the ACH service provider agreement contains a further agreement that each transaction shall not breach any federal, state or local statute or regulation pertaining to electronic funds transfers and/or electronic check re–presentment. Since the NACHA Rules require a written authorization, there has to be a false representation to initiate an EFT without a written authorization.

The Eight Circuit Court of Appeals first noted the representation at issue—that the debt collector initiating the transaction would comply with the NACHA rules—was made between the debt collector and its ACH service provider. Though the transaction may not be in compliance with the terms of the contract between the debt collector and the ACH service provider, that would be a breach of that contract and not a false, deceptive or misleading representation by the debt collector. The Court further concluded that the debt collector did not affirmatively make a misrepresentation to the ACH service provider at the time it initiated the EFT for the check fee. In such a situation, any claims relating to that EFT belonged to the ACH service provider for a breach of contract, not the third-party consumer.

Thus, even though the consumer repeatedly pointed to the debt collector–service provider contract which contained representations and warranties, including that for each entry submitted that the account holder has authorized the debiting of the account for the amount to be debited, and that "each entry is in all respects properly authorized," there was no misrepresentation to the consumer. The Eighth Circuit Court of Appeals disagreed with the consumer's contention that a misrepresentation to a third party could be asserted as a misrepresentation to support a claim under the FDCPA by the consumer.

The Eight Circuit Court of Appeals reached this decision after considering the purpose of the FDCPA. This consumer protection act is designed to protect consumers from abusive debt collection practices such as the use or threat of violence, obscene language, publication of shame lists and harassing telephone calls. In this case, the consumer states he was harmed by insufficient fund fees assessed by his own credit union when check dishonor fees were presented by EFT and the EFT bounced. Though there may have been these additional bank fees, that is an issue between the consumer and his bank. In properly (from the collection industry perspective) analyzing the issue, the Court concluded that the consumer merely "reaped the consequences of writing bad checks." The consumer had notice that a collection fee would be assessed and had authorized consistent with the provisions of Regulation "E" (posted notice implied contract) the debt collector to initiate an EFT for the amount from the consumer's account. The EFT for that fee did not violate the FDCPA. The contractual arrangements between the debt collector and the ACH provider do not enhance the consumer's FDCPA rights.

Another issue addressed by the FDCPA that may be lost in the EFT issues relates to the language required in subsequent notices from a debt collector. As you are all aware, the FDCPA requires the Mini–Miranda in the first notice. In all subsequent notices, the debt collector must tell the consumer that the communication is from a "debt collector." For the letters at issue, the subsequent letters contained the Mini–Miranda, but did not use the magic words "debt collector."

The consumer argued the FDCPA was violated because the subsequent collection letters did use the magic words "debt collector." The Eight Circuit Court of Appeals found that since the subsequent letters sent to the consumer did include the Mini–Miranda, "Though the letter does not say it is from a debt collector, the fact it says it is sent in an attempt to collect a debt is sufficient for even the unsophisticated consumer to understand that such a letter is necessarily from a 'debt collector.'"

While notice reviewers strive to be literal in the application of the FDCPA for purposes of the collection notice review process, the Court (in this case) applies the law in a logical, practical manner. This is also consistent with the history of this provision. The FDCPA originally required the Mini–Miranda in every communication. Realizing that this made little sense, Congress amended the FDCPA to only require it in the initial communication. But to make sure the consumer was never confused in receiving a letter from or speaking with someone who was a debt collector, there was the requirement that in subsequent communications there be at least a reduced version of the Mini–Miranda indicating the communication was from a debt collector.

In concluding the issue, the court stated, "While the unsophisticated consumer test is meant to protect consumers of below average sophistication, it also involves an element of reasonableness that prevents bizarre interpretations of debt collection notices. We find the letter 'effectively conveys' the fact that it is from a debt collector, and thus does not violate Section 1692e(11). Id. at 1056." It is important to remember that even when the "least sophisticated debtor" standard is applied, it's an objective standard and there is some level of sophistication that a consumer is presumed to have concerning the debt collection efforts.

Finally, the consumer argued the debt collector failed to give a proper validation notice as required by the FDCPA. The FDCPA does not specify a standard notice form, but provides the contents of what must be disclosed. The record in this case established that the validation notice was not a precise restatement of what is stated in the FDCPA. The collection letter notified the consumer that "if you notify this office in writing, within 30 days, this office will send you verification of you [sic] debt" (see Sections 1692g(a)(3)–(4))," and identified the creditor stores where the bad checks had been given by the debtor. One thing that was missing was telling the consumer that if requested in writing, the name of the original creditor would be provided.

Though the court determined the notice form did not literally comply with the wording specified in the FDCPA, the Court concluded there was substantial compliance with the consumer–protection purposes of the statute. The Eight Circuit Court of Appeals expressly disagreed with the Seventh Circuit rationale in Huff v. Dobbins, an unpublished decision from 1999 not allowing for substantial compliance. While this Court said that it substantially agreed with the Seventh Circuit, noting there is little room for deviation of what goes into a validation notice, the Eight Circuit Court of Appeals looked to the actual facts in this case.

There was no question that the consumer was at all times fully aware that he had presented the dishonored checks to the creditor stores and the debt collector expressly identified the two stores in the letter. What was left off was the statement telling the consumer that "the name and address of the original creditor would be provided, if different from the current creditor." Since the names and addresses of the original creditors (store locations where checks were written) were provided, there could be no useful information that could be provided if the question was asked by the consumer. Since, at best, "the technical and meaningless omission by [the debt collector] have not been seen by Congress as a purposeful violation of the FDCPA."

This final holding is very significant in FDCPA interpretation. While some other courts have tried to apply the FDCPA in a literal and rote manner, this court looked for the actual application in light of the consumer protection to be served. This decision also heralds the concept that the court should consider the real impact of an alleged violation and whether there is a true consumer interest to protect. Though no agency should take this as an opportunity to just "substantially comply" with the FDCPA and then try and argue their way out of an alleged violation, it does provide Circuit authority for the concept that one must look to a real violation of the FDCPA to support a claim for damages.