Ms. Judith Klayman
Dear Ms. Klayman:
John LeFevre has asked me to respond to your recent letter requesting an informal staff opinion concerning the applicability of the Fair Debt Collection Practices Act ("the Act") to Telecheck Northwest ("Telecheck"), a check guarantee service. You ask whether Telecheck would be considered a "debt collector" under the Act in a situation where it purchases consumers' dishonored or "NSF" checks from merchants for a percentage of their face value, subsequently attempts to collect the face value of the checks, and retains all amounts collected.
As you know, Section 803(6) of the Act defines a "debt collector" as (1) anyone who uses any instrumentality of interstate commerce or the mails in a business which has as its principal purpose the collection of debts., or (2) anyone who regularly collects debts owed or due another.. In the situation you describe, Telecheck may meet the first part of this definition if its principal business purpose is the collection of NSF checks. While it also "regularly" collects debts, those debts are no longer "owed or due another" since Telecheck has purchased the NSF checks and is collecting them on its own behalf. Thus, the question at issue is whether the definition of a debt collector in Section 803(6) is limited to persons who collect debts "owed or due another" in situations where the debts were initially owed to another and were in default at the time of purchase by the persons collecting them.
At least one court has considered this issue and we find its reasoning persuasive.(1) In that case, the court analyzed the Act's construction, particularly its definitions of a "creditor" and a "debt collector," and the relationship between these two definitions. First, the court noted that Section 803(4) defines a "creditor" as any person who "extends credit creating a debt or to whom a debt is owed" but does not include those who "receive an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another." The court suggested that the first part of the definition defines generally "the universe of creditors" while the second part, the assignee exception, excludes from that universe "those persons who collect assigned or transferred debts that are already in default when assigned or transferred."(2) The court opined that interpreting the second part or the definition as applying only to those who collect debts for others would "render the exception superfluous and meaningless."
The court applied a similar reasoning to the phrase "owed or due another" in the Act's definition of a debt collector. The court reasoned that the first part of Section 803(4) defines the universe of creditors as those who collect debts for themselves, and that Section 803(6)(A) then excludes these creditors from the general definition of a debt collector. It then concluded that "[t]here would be no need to exclude creditors -- those who-collect-debts' for themselves -- from the general definition of debt collector unless that general definition included those who collect debts for themselves." The court then held that the Act applies to a corporation collecting its own debts if that corporation regularly collects debts, is engaged principally in debt collection, and collects debts that were "already in default when they were assigned to the corporation."(4) Under this interpretation of the Act, which we believe is correct, Telecheck would be considered a debt collector subject to the Act's requirements.
You also inquire whether a debt collector who violates a state garnishment statute in the process of collecting or attempting to collect a debt thereby violates the Act. You explain that in Washington state, in order to obtain a writ of garnishment, a creditor or collector must file an affidavit with a court stating that the affiant "believes and has reason to believe" that the debtor's bank account contains funds that can be garnished. You believe that Telecheck violated this law by filing such an affidavit with regard to your client's bank account when it had no "reasonable factual basis" for declaring that your client's account contained nonexempt funds. You inquire whether, in the event a Washington judge found that Telecheck's action violated Washington law, we would consider Telecheck's action to also violate the Act.
As you know, Section 807 or "the Act" prohibits generally any false, deceptive, of misleading representation or means in connection with the collection of a debt. In addition, Section 807(4) of the Act specifically prohibits a debt collector from falsely representing or implying that nonpayment of a debt will result in the "garnishment, attachment, or sale of any property or wages of any person," and Section 807(5) prohibits a collector from threatening "to taken any action that cannot legally be taken. . ." A collector must have used ". . . false, deceptive, or misleading representations or means in connection with the collection of a debt" in order to violate Section 807. Without substantial additional information, we cannot make that determination in this instance. Violation of a state law concerning debt collection may or may not be a violation of the comparable federal law, depending on the facts in each individual case.
This letter represents an informal staff opinion and is not binding on the Commission or any court. I hope I have responded fully to your inquiry. Pursuant to your request, I have also enclosed a copy of the Commission's 1980 consent judgment against Telecheck Washington, Inc.
1. Kimber v. Federal Financial Corporation, 668 F. Supp. 1480 (M.D. Ala. 1987) (copy enclosed).
2. Id. at 1485.
4. Id. at 1486.