Right before Thanksgiving, on November 21, 2008, the Federal Trade Commission (FTC) announced the largest civil penalty ever obtained in a debt collection case. This enforcement action highlights the FTC’s announced commitment to scrutinize debt collection practices, especially at a time when the volume of debt collection activity is expected to increase substantially.
The $2.25 million civil penalty will be paid by Academy Collection Service, Inc. (“Academy”), a nationwide debt collection company, and its owner, to settle FTC charges that the company violated section 5 of the FTC Act and the Fair Debt Collections Practices Act (“FDCPA”). Section 5 of the FTC Act outlaws “unfair or deceptive acts or practices in or affecting commerce,” whereas the FDCPA prescribes detailed rules that debt collectors must comply with, in addition to generally prohibiting debt collectors from making deceptive representations or using unfair means in debt collection. Therefore, a violation of either Act may subject the violator to a civil penalty and/or injunction.
In its action, the FTC alleged that Academy engaged in deceptive practices in violation of Section 5 of the FTC Act by misrepresenting to consumers that nonpayment of a debt would result in garnishment of their wages, arrest, or legal action, and that Academy engaged in unfair practices by withdrawing funds from consumers’ bank accounts without obtaining the consumers’ express informed consent. The FTC also alleged various violations of the specific provisions of the FDCPA, such as depositing or threatening to deposit postdated checks prior to the date on such checks, communicating with consumers at inappropriate times or locations, and threatening to harm the person, reputation, or property of consumers.
In addition to paying the penalty, Academy is enjoined from violating the FTC Act or the FDCPA. It must also provide certain disclosure to consumers about their rights, as well as certain disclosure to its employees regarding their obligations. Academy must report to the FTC periodically on how it complies with the injunction and the disclosure requirements, and submit itself to FTC monitoring.
Importantly, the case was brought under both the Fair Debt Collection Practices Act (“FDCPA”) and Section 5 of the FTC Act. Generally, the FDCPA applies only to debt collectors and not lenders who service their own debt. However, in this case, the FTC also charged the company with violations of Section 5 of the FTC Act -- unfair or deceptive practices -- in its collection activities. Since the prohibition on “unfair or deceptive” practices under the FTC Act applies to any lender under the FTC’s jurisdiction (not just debt collectors), this type of action can be pursued even against lenders seeking the collection of their own originated debts.
Thus, lenders of all types, including banks, automobile lenders, payday lenders and others, should review their debt collection practices policies in light of this action.
