Credit and Debit Card Processing Fees and the FDCPA.
Recent legal trends in consumer protection are causing Arkansas creditors and debt collectors to reevaluate collection practices. The recent litigation of claims brought under the Fair Debt Collection Practices Act (“FDCPA”) in other states has provided both clarity and a warning shot to debt collectors with regard to the collection or attempts to collect pass through fees.
Debt collection does not take place in a financial vacuum. As with any business, there is a cost associated with transacting business. The wide spread use of credit cards and debit cards in all other areas of commerce has caused a marked increase in the cost of processing payments. Unlike most other industries, debt collectors cannot always pass these costs along. The consequence had been a large increase in the cost of collecting debts.
Section 1692f of the FDCPA prohibits the collection of charges incidental to the primary debt unless the charge is expressly authorized by the underlying contract. Section 1692e bars debt collectors from misleading consumers in connection with the collection of any debt.
As far back as 1999, in Tuttle v. Equifax Check, courts have held that a debt collector cannot collect service charges to defray costs unless state law expressly permitted the charge or state law was silent as to the issue and the underlying contract creating the debt permitted the charge. More recently, in New York, a new line of cases reflects the current trend in the law. In Campbell v. MBI Associates and Quinteros v. MBI Associates, Inc., New York courts held that section 1692f (1) bars the collection of any fee incidental to the primary obligation unless that charge is expressly authorized by the agreement creating the debt or is otherwise permitted by state law. The court stated that the issue is determined from the perspective of the “least sophisticated consumer.”
Debt collectors should note that the holding in Campbell recognizes FDCPA violations for attempting to collect a fee even if it isn’t actually collected. The court held that a donning letter quoting a $5.00 processing fee if the debtor elected to pay by credit card was an attempt by the debt collector to collect that fee even though (a) it did not collect the fee and (b) the fee was only for what the bank charged to process the payment.
Courts in the Second Circuit, Sixth Circuit, and Seventh Circuit have recognized an exception for third party processors, who do not collect debts but merely process payments by credit and debit card. These courts have held that no “collection” occurs when a third party processes the transaction and the transaction fee charged by the third party is not shared with the debt collector. This exception was briefly acknowledged in Campbell, and so it remains despite the current trends.
However, the issue remains untested in other Circuits. In Georgia, the FTC entered into a consent order which required a debt collector to satisfy certain disclosures in order to collect pass through fees. In FTC v. Security Credit Servs., LLC, 1:13-cv-00799-CC (N.D. Ga 2013), the FTC required the violating debt collector to clearly and prominently disclose to consumers before the consumer agrees to make a payment: (1) the fee will be charged; (2) the amount of the fee; (3) the frequency of charges; (4) the reason for the fee; and (5) how the fee can be avoided. This infers that a debt collector in Georgia might be able to charge pass through fees with certain disclosures, which is inconsistent with case law. Even though FTC opinions and consent orders are not precedent, this inconsistency in the interpretation of the rule has created a crisis of confidence among debt collectors.
Arkansas Code Annotated § 17-24-507 incorporates the FDCPA rule prohibiting collection of any fee incidental to the principal obligation unless permitted by the underlying agreement creating the debt or permitted by law. If Arkansas courts and the Eighth Circuit follow current precedent, fees charged by third party processors should not be viewed as “collections” and 15 U.S.C. 1692f should not apply.
However, if a court does not follow current precedent, and applies 1692f, it would look to see if state law permits or prohibits the charge. If state law is silent, the court would look to the underlying contract. Right now, there is no Arkansas law expressly permitting or preventing a debt collector from charging a fee for accepting credit or debit card payments. This means that if the underlying agreement creating the debt expressly authorizes the collection of credit/debit card fees, then the debt collector can collect those fees. But it is uncommon for underlying contracts to expressly authorize fees to be charged for payments by credit or debit card.
Arkansas’s Deceptive Trade Practices Act includes a provision, at § 4-88-107, which generally prohibits any party from engaging in false or deceptive business practices. This is similar to, but is separate from, the FDCPA bar to misleading practices at section 1692e. Given the trend in consumer protection law and the holding under Campbell, any company who leads a consumer to believe that a debt collector is entitled to collect processing fees for a credit or debit card is risking accusations of a deceptive or misleading business practice.
If you are a creditor who is unsure how to proceed with collecting money that is owed to you, please contact Lance Owens at Owens, Mixon & Gramling, P.A. 1-870-336-6505 or by email at firstname.lastname@example.org.