The debt collection community has been concerned with whether a debt collector can charge interest under the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692 et seq. A creditor will usually “charge off” a debt when a consumer fails to make monthly payments for six consecutive months, at which point the account is closed to future charges, although the consumer still owes the debt. Many creditors will not collect interest on a charged off debt even if they have the right to do so. One pressing issue is whether a debt collector may collect interest on a debt in a situation where the creditor had stopped charging interest. The second issue is interpreting a debt collector’s responsibilities under the FDCPA regarding providing the debtor with information as to the accrual of interest.
Waiver of Interest by Creditor
The Consumer Financial Protection Bureau has offered the following guidance as to whether debt collectors are permitted to collect interest on charged off debts:
A debt collector may not collect any interest or fee not authorized by the agreement or by law. The interest rate or fees charged on your debt may be raised if your original loan or credit agreement permits it. Some state laws and some contracts allow interest to be charged and costs to be added. If you still have the contract, it may say what interest rate can be charged or how much it can increase. State law may also limit the amount of interest charged.
Creditors often stop charging interest after they charge off a defaulted account because of certain business reasons and because they are otherwise obligated under the Truth in Lending Act to send monthly statements to cardholders. Many debt collectors have attempted to collect interest both retroactively and monthly moving forward in their collection attempts. Some attorneys for debtor plaintiffs have successfully argued that in this situation, the creditor may have legally waived the right to collect interest and that the waiver may apply to the debt buyer who purchases the debt.
For example, in Simkus v. Cavalry Portfolio Servs., LLC, et al., 2014 U.S. Dist. LEXIS 9470 (N.D. Ill. Jan. 27, 2014), Cavalry attempted to collect interest retroactively from the time that the creditor charged off the debt to the point that it sold the debt to the debt buyer. The court denied Cavalry’s motion for summary judgment on the Section 1692e and 1692f claims and held that under Arizona law, a fact finder would need to determine whether the creditor waived its right to collect interest. The Simkus court stated that if a trier of fact determined that the creditor waived its right to collect interest, then Cavalry violated Section 1692e. However, the court dismissed Simkus’ Section 1692f(1) claim and held that Cavalry did not attempt to collect an unauthorized debt, reasoning that there was no dispute that the original contract permitted the collection of interest. The court noted that “§ 1692f(1) is ‘directed at debt collectors who charge fees not contemplated by the original agreement, not debt collectors who seek to charge fees contemplated by the agreement but arguably waived thereafter.’”
While the Simkus court held that only a jury could decide the waiver issue and that there was no Section 1692f(1) violation, in McDonald et al. v. Asset Acceptance, LLC, 2013 U.S. Dist. LEXIS 110829 (E.D. Mich. Aug. 7, 2013), the court decided those same issues on summary judgment and did not leave them to be heard by a jury. The court granted summary judgment to McDonald and held that Asset violated Sections 1692e(2)(A) and 1692f(1) when it attempted to collect interest, including retroactive interest. The judge reasoned that “because Chase and WFNB waived the interest, Asset could not retroactively impose interest for the period in which it did not own the accounts. . . . To hold otherwise would create a monetary interest out of thin air and provide a potential windfall to Asset.”
Finally, it is important for debt collectors to research state laws in the state in which they are collecting to determine whether debt collectors are permitted to charge interest, and if so, the rate at which they are permitted to collect. Even in cases where the creditor waived its contractual right to collect interest, some states permit debt collector to charge statutory interest at a rate approved by state law.
Disclosure of Interest Accrual
The second hot topic issue is how debt collectors must disclose to the debtor the accrual of interest, if at all. Section 1692g(a)(1) of the FDCPA only requires the debt collector to state the “amount due” when communicating with debtors. Courts have been left to interpret how exactly the debt collector must disclose the accrual of interest. Various judges have reached opposite conclusions in interpreting this section.
A Pennsylvania judge in Jones v. Midland Funding, LLC, 755 F. Supp. 2d 393 (D. Conn. 2010), granted summary judgment to Jones, holding that Midland violated Section 1692g(a)(1) where Midland stated the “balance due” in its initial letter, the subsequent letter stated a “balance due” for a greater amount, and neither letter mentioned interest accrual. The court determined that only the initial letter violated the FDCPA because it failed to state that interest was accruing and the rate at which it was accruing. Another Pennsylvania judge in Lukawski v. Client Servs., Inc., 2013 U.S. Dist. LEXIS 124075 (M.D. Pa. Aug. 29, 2013), considered a case with slightly different facts and ruled that where the first letter discloses that interest will accrue, subsequent letters must also disclose the accrual of interest.
Certain federal judges in New York have not required debt collectors to disclose the interest accrual so long as the initial letter and subsequent letters state the correct balance due. However, some debt collectors have been exposed to liability when they attempt to explain the interest accrual. In Weiss v. Zwicker & Associates, P.C., 664 F. Supp. 2d 214 (E.D.N.Y. 2009), Zwicker & Associates sent an initial letter to Weiss stating:
[A]s of the date of this letter, the balance on your account is $30,982.09. Your balance may include additional charges including delinquency charges, as applied at the direction of American Express, if said charges are permissible in accordance with the terms of your agreement.
Zwicker & Associates sent another letter stating that the balance was $32,596.04, which is higher than the balance listed in the first letter. The court held that the initial letter violated Section 1692g(a)(1) of the FDCPA because it could be read by the least sophisticated consumer in two ways; one being that the amount included interest, the other that the amount did not include interest. Interestingly, the court found that the second letter was permissible under the FDCPA because a debt collector “has [no] obligation to explain why a consumer’s debt has increased.
The Weiss court did not consider the issue of whether a debt collector is obligated to inform the consumer in the initial letter that interest is accruing. However, the year after the Weiss decision, the judge in Pifko v. CCB Credit Servs., 2010 U.S. Dist. LEXIS 69872, at *10 (E.D.N.Y. July 7, 2010), addressed that exact issue. In Pifko, the debt collection letters simply stated the balance owed and the letters reflected a higher balance with each letter sent. The letters did not mention interest accrual. The court held that none of the letters violated Sections 1692g or 1692e(10), because the letters contained no confusing language. Certain federal judges in Arizona and Massachusetts have reached the same conclusion based on similar reasoning in cases with nearly identical facts and claims. (See Goodrick v. Cavalry Portfolio Servs., 2013 U.S. Dist. LEXIS 117171 (D. Ariz. Aug. 19, 2013); Schaefer v. ARM Receivable Mgmt, Inc., 2011 U.S. Dist. LEXIS 77828 (D. Mass. July 19, 2011.)
Taking a look back at Simkus v. Cavalry Portfolio Servs., LLC et al., 2014 U.S. Dist. LEXIS 9470 (N.D. Ill. Jan. 27, 2014), the same case as was discussed in the first section of this article pertaining to the waiver issue, the court also addressed how debt collectors must communicate interest accrual to debtors. The Simkus facts are the same as Pifko, Goodrick, and Schaefer, where the letters made no mention of whether interest had been added to the amount owed and simply stated the balance owed. In contrast to those cases, where the courts held that the collectors had no obligation to inform the debtors that interest was accruing, the Simkus court held that while the letters on their face did not violate Sections 1692e or 1692f because Cavalry was not required to itemize interest and principal, the parties had to brief the related issue of whether Simkus had extrinsic evidence to prove that the least sophisticated consumer would be confused by the letters.
Some courts have suggested particular safe harbor language that collectors may use in letters to debtors. For example, in Miller v. McCalla, Raymer, Padrick, Cobb, Nichols and Clark, LLC, 214 F.3d 872 (7th Cir. 2000), the Seventh Circuit approved the following language:
As of the date of this letter, you owe $___ [the exact amount due]. Because of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay may be greater. Hence, if you pay the amount shown above, an adjustment may be necessary after we receive your check, in which event we will inform you before depositing the check for collection. For further information, write the undersigned or call 1-800-[phone number].
A Connecticut judge, in Jones v. Midland Funding, LLC, 755 F. Supp. 2d 393, 398 (D. Conn. 2010), suggested the following language:
As of today, [date], you owe $___. This amount consists of a principal of $___, accrued interest of $___, and fees of $___. This balance will continue to accrue interest after [date] at a rate of $___ per [day/week/month/year].
Debt collectors must carefully draft their letters based on the state and federal law in the jurisdiction where the debtor resides in order to lessen the chances of being held liable for an FDCPA violation regarding disclosure of interest. If the debt collector chooses to inform the debtor that interest is accruing, then using the safe harbor language suggested by courts within the jurisdiction may reduce the debt collectors’ exposure to FDCPA liability.
Certain judges have held that only a jury can decide the issue of whether a debt collector may charge interest in situations where the creditor stopped collecting interest after charging off the debt. Debt collectors must understand whether state laws restrict collectors from charging contractual or prejudgment interest. Additionally, courts have interpreted the FDCPA differently regarding whether a debt collector must disclose that interest is accruing on the account. Some judges require the debt collector to inform the debtor in the initial letter that interest may be accruing and the rate at which it is accruing. Other judges have determined that debt collectors have no obligation to disclose that interest is accruing, and that the debt collectors must only correctly state the total amount due. Many collectors are finding that attempting to collect post-charge off interest is too much of a risk and have been foregoing the practice in its entirety.