Collection fees violate Consumer Act

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Debt collectors can’t tack on additional collection fees to the debts they purchase.

The Seventh Circuit held on Dec. 8 that, in the absence of a contractual provision between the debtor and the original creditor, the practice violates both the Fair Debt Collection Practices Act (FDCPA), and the Wisconsin Consumer Act (WCA).

AFNI Inc. is a collection agency that purchased a number of defaulted accounts from cell phone companies.

The original contracts between the customers and phone companies stated that the customers agree to pay the fees of any collection agency, up to a maximum of 33 percent of the debt, plus costs and attorney fees, “incurred” by the phone companies in enforcing the contract.

ANFI sent collection letters to the debtors of the accounts they purchased, which stated that the debtors were responsible for paying AFNI a collection fee of 15 percent of the original balance.

The debtors filed a class action, alleging that the addition of a collection fee violated the FDCPA and the Wisconsin Consumer Act.

U.S. Magistrate Judge William E. Callahan, Jr. granted summary judgment in favor of the debtors, and the Seventh Circuit affirmed in an opinion by Judge Diane P. Wood.

Under the FDCPA, in order to collect a fee, a debt collector must show the fee is either authorized by contract or by applicable state law.

First, the court held that Wisconsin law does not allow the collection fee, even though it permits recovery of losses that are the natural and probable result of a breach of contract, if the losses were within the reasonable contemplation of the parties.

The court first noted that the record is silent on how much AFNI paid for the debts it purchased, and that the common practice is for purchasers of debt to buy a portfolio of debts at a discount, to compensate for those debts that will prove uncollectible.

Furthermore, the court found the record silent on whether the 15 percent collection fee reflects AFNI’s actual costs, speculating that the discount at which it buys accounts likely covers those costs.

In addition, what was in the record suggested that AFNI’s costs were constant across accounts, regardless of the amount of the debts. Yet, AFNI was adding on a percentage of the full debt, rather than a flat fee.

Second, the court held that the original contracts did not authorize the collection fees.

The court acknowledged that the contracts allowed the phone companies to charge up to 33 percent of fees incurred in collection.

However, the companies did not incur any fees, but instead, they sold the debts to a third party.

The contract provision referred to actual fees incurred, such as court costs and attorney fees, which were not actually incurred by either the phone companies or AFNI.

Finally, the court noted that the original contracts could have, but did not, include collection fees as a permissible cost that could be added.

Quoting the district court, Judge Wood iterated, “the language of the contract does not simply state that a customer agrees to ‘pay all costs including … collection fees.’ Rather, the contract states that the customer agrees to ‘pay all costs including … collection fees … we incur in enforcing this Agreement.’”

Before concluding, the court addressed the FDCPA’s bona fide error defense, codified in 15 U.S.C. 1692k(c).

While other circuits are split on whether the defense applies to mistakes of law, the Seventh Circuit has not addressed it, and the court found it unnecessary to decide the issue in this case.

Here, AFNI did not consult a Wisconsin attorney on the WCA, nor did it ask a government agency whether the collection fees were permitted.

Accordingly, Judge Wood wrote, “In the end, AFNI is not arguing that it relied on an informed, but mistaken, legal opinion. It is saying that its ignorance of the law should be excused because it attempted to keep itself informed about the law through the various trade association communications. This is not enough, in our view, to support the bona fide error defense.”