Laws and Regulations on Collection Agencies

You asked about the laws and regulations that apply to debt collection agencies, particularly what they can and cannot do in attempting to collect a debt.

Connecticut and federal law regulate debt collection practices extensively and specify in detail what consumer collection agencies, which work for creditors in attempting to collect debts from consumer debtors, can and cannot do. Both laws are identical in what the agencies can do in trying to collect a debt. Collection agencies may not engage in abusive, harassing, fraudulent, deceptive, misleading, or unfair practices. The federal law and state regulations specify how the agencies must conduct themselves in obtaining initial information on the debtor's location and communicating with the debtor and others about the debt. They list specific actions that constitute harassment, abuse or fraud, such as threatening violence, making repeated phone calls at inconvenient hours, making false representations, or falsely threatening legal action. But state law, in addition, requires consumer collection agencies to be licensed by the state banking commissioner and also regulates their behavior toward their client creditors, which federal law does not. The federal law does not preempt state law unless the two laws are inconsistent. States can apply for exemptions from the federal law, but Connecticut has not done so.

The federal law is enforced mainly by the Federal Trade Commission (FTC), but it also gives private individuals the right to sue and sets the civil damages that a court can award in these cases. The FTC has no regulations on this. There was a brief FTC guide concerning debt collection that listed a few examples of deceptive acts toward both the debtor and the client, but the FTC eliminated the guide this August since it was redundant with the law. State law gives the state banking commissioner numerous enforcement powers and sets maximum penalties for engaging in the consumer collection business without a license or otherwise violating the state provisions.

The federal Fair Debt Collection Act and state law and regulations contain virtually identical requirements for what debt collectors can do in acquiring location information, communicating with the consumer and with third parties, and the conditions under which they must cease communications. They also contain the same provisions concerning prohibited acts of harassment or abuse, unfair practices, furnishing of deceptive forms, debt validation, disputed debts, and multiple debts. Both laws apply only to the agencies' interactions with consumer debtors, not with other businesses. A consumer debtor is any natural person to whom a creditor extends credit for personal, family or household purposes. The federal law applies to “debt collectors” and the state law covers “consumer collection agencies,” but the two terms appear to mean the same and are used interchangeably in this memo, as applying to agencies and their employees who collect debts on behalf of others. Creditors who themselves collect debts that are due them are subject to similar provisions concerning their conduct elsewhere in Connecticut statute.

Both federal law and state banking department regulations require consumer collection agencies to follow specific rules in contacting a third party (such as a neighbor or employer) to acquire information on where the debtor is located. The agency's employee or official must identify himself and state that he is confirming or correcting location information concerning the consumer, but he can identify his employer only if expressly requested. At this point, he may not state that the consumer owes any debt nor convey debt information in any other manner. He may not communicate with the third party more than once about a particular debtor unless (1) the individual requests it or (2) the debt collector reasonably believes the individual's earlier response was in error or incomplete and that he now has correct or complete information. He may not communicate by postcard nor use anything on an envelope or in the contents of a communication indicating that it relates to a debt collection. After the debt collector knows the debtor is represented by an attorney with regard to the debt and knows the attorney's name and address, or can readily ascertain it, he may not communicate with anyone other than the attorney unless the attorney fails to respond in a reasonable time (Conn. Agencies Reg. § 42-131d-3a(c)), 15 U.S.C.A. § 1692b).

Without the debtor's prior consent or a court's express permission, a collection agency may not communicate with a debtor about collecting any debt:

1. at an unusual time or place or at a time or place known or that should be known to be inconvenient to the debtor (unless he knows otherwise, a collector must assume that a convenient time is after 8 a.m. and before 9 p.m.);

2. if he knows the debtor is represented in this matter by an attorney and knows the attorney's name and address, or can readily ascertain it, unless the attorney fails to respond to the collector's communication or unless the attorney or the debtor consents to direct communication; or

3. at the debtor's place of employment if the collector knows or should know that the employer prohibits employees from receiving such communication (Conn. Agencies Reg. § 42-131d-3a(d), 15 U.S.C.A. § 1692c).

Communication with Third Parties

After he obtains initial location information, a collector may not, without the debtor's prior consent, contact anyone other than the following people in connection with a debt collection: the debtor or his attorney, a consumer reporting agency if allowed by law, the creditor or the creditor's attorney and accountant, or the debt collector's own attorney (Conn. Agencies Reg. § 42-131d-3a(d)(2), 15 U.S.C.A. § 1692c (b).

Ceasing Communications

A collection agency must cease communicating with a debtor who notifies the agency in writing that he refuses to pay a debt or wishes the agency to cease further communication with him. If this occurs, there are only three types of communications the agency may still make. It may advise the debtor that it is discontinuing further efforts, notify him that it may invoke certain remedies, or notify him that it intends to invoke a specified remedy (Conn. Agencies Reg. 42-131d-3a(d)(3), 15 U.S.C.A. 1692c(c)).

Harassment or Abuse

A debt collector may not engage in any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt. State regulations and federal law specify that the following conduct constitutes harassment or abuse:

1. using or threatening to use violence or other criminal means to harm the individual's physical person, reputation or property;

2. using obscene or profane language or language that has the natural consequence of abusing the hearer or reader;

3. publishing a list of debtors who allegedly refuse to pay debts, except to a credit reporting agency;

4. advertising any debt for sale as a means to coerce its payment;

5. causing a phone to ring or engaging anyone in phone conversation repeatedly or continuously with intent to annoy, abuse, or harass; or

6. making phone calls without meaningfully disclosing the caller's identity, except for a call to obtain location information (Conn. Agencies Reg. § 42-131d-3a(e), 15 U.S.C.A. § 1692d).

1. falsely representing or implying that the creditor is vouched for, bonded by, or affiliated with the United States or any state;

2. falsely representing a debt's character, amount or legal status, or any collection agency's services or compensation;

3. falsely representing or implying that any individual is an attorney or that any communication is from an attorney;

4. representing or implying that not paying any debt will result in arrest or imprisonment or the seizure, garnishment, attachment or sale of any property or wages unless such action is lawful and the debt collector or creditor intends to take it;

5. threatening to take any action that cannot be legally taken or that the creditor does not intend to take;

6. falsely representing or implying that a sale, referral or other transfer of any interest in the debt will cause the debtor to lose any claim or defense to payment of the debt or become subject to any practice prohibited by this law;

7. falsely representing or implying that the debtor committed any crime or any disgraceful act;

8. giving or threatening to give anyone false credit information or failing to communicate that a debt is disputed;

9. using or distributing any written communication simulating a court or government document or which creates a false impression as to its source, authorization or approval;

10. using any false representation or deceptive means to collect or try to collect a debt or obtain information about a debtor;

11. failing to disclose clearly in communications that the collector is trying to collect a debt and that any information will be used for that purpose, except for initial contacts to locate the debtor;

12. falsely representing or implying that the debt accounts have been turned over to innocent purchasers;

13. falsely representing or implying that documents are or are not legal process, or do not require the debtor to take any action;

14. using any business, company, or organization name other than the true name of the collection agency's business, company or organization; and

15. falsely representing or implying that a collection agency operates or is employed by a consumer reporting agency (Conn. Agencies Reg. § 42-131d-3a(f), 15 U.S.C.A. § 1692e).

1. collecting any amount (including any interest, fee, charge, or expense incidental to the debt owed) unless it is expressly authorized by the agreement creating the debt or permitted by law;

2. accepting a check that is postdated by more than five days unless the collector notifies the person that he intends to deposit the check between three and 10 days before the intended date of deposit;

3. depositing or threatening to deposit a postdated check before the date of the check or soliciting a postdated check for the purpose of threatening or instituting criminal prosecution;

4. causing charges to be made to anyone for communications such as collect phone calls and telegrams by concealing the communication's true purpose;

5. taking or threatening to take any nonjudicial action to cause dispossession of property if there is no right to the property as collateral through an enforceable security interest, no intention to take possession of the property, or the property is exempt by law from such dispossession;

6. Sending the debtor a postcard concerning the debt;

7. using any language or symbol, other than the debt collector's address, on an envelope that would give the impression that the communication is about a debt collection, except that the agency can use its business name if the name does not indicate it is in the debt collection business (Conn. Agencies Reg. § 42-131d-3a(g), 15 U.S.C.A. § 1692f).

1. unless the debtor, within 30 days after receiving the notice, disputes the debt's validity, the agency will assume the debt is valid;

2. if the debtor notifies the agency in writing within the 30-day period that the debt is disputed, the agency will obtain verification of the debt or a copy of the judgment against the debtor and mail a copy of the verification or judgment to the debtor; and

3. at the debtor's written request within the 30-day period, the agency will give him the original creditor's name and address if it is different from the current creditor's.

If this information was already in the initial communication, the agency does not need to send it again within the five days.

If the debtor gives the agency any of the above notifications in writing, it must cease collecting the debt, or any disputed part of it, until it has acquired verification, a copy of the judgment, or the original creditor's name and address and has mailed the debtor the relevant document. The law specifies that a debtor's failure to dispute a debt under the above provisions does not constitute an admission of liability (Conn. Agencies Reg. § 42-131d-3a(h), 15 U.S.C.A. 1692g).

Multiple Debts

If a debtor owes multiple debts and makes any single payment to an agency, the agency cannot apply the payment to a disputed debt and, where applicable, must apply the payment according to the debtor's directions (Conn. Agencies Reg. § 42-131d-3a(I), 15 U.S.C.A. 1692h).

Furnishing Deceptive Forms

Federal law and state regulation prohibit anyone from designing, compiling, or furnishing any form knowing that it would be used to make the debtor believe falsely that someone other than the creditor is participating in an attempt to collect a debt, when in fact the person is not (Conn. Agencies Reg. § 42-131d-3a(j), 15 U.S.C.A. 1692j).

Legal Action by Debt Collectors

Federal law requires any debt collector who brings legal action against a consumer debtor to bring the action only in the judicial district where:

The law specifies that this provision does not by itself authorize debt collectors to bring legal actions (15 U.S.C.A. 1692i). Connecticut law contains a provision that prohibits collection agencies from instituting judicial proceedings on behalf of others (CGS § 36-805).

STATE LICENSING AND CONDUCT TOWARD CLIENTS

License Required

State law requires the banking commissioner to license consumer collection agencies which are in the business of collecting (or receiving payment for others) any account, bill or indebtedness from a consumer debtor, including anyone who pretends to be a collection agency, or engages in related activities (CGS § 36a-801).

Licensing is not required for agency employees trying to collect debts owed the agency itself, for employees of creditors (who are exempt from licensing), and certain other people such as public officers or individuals acting under a court order, lawyers, and loan servicers (CGS § 36a-800(1)).

The law establishes procedures for license applications, approvals, denials, renewals, suspensions and revocations. It sets an annual license fee of $400 and an initial investigation fee of $100. It requires a collection agency to file a $5,000 bond with the banking commissioner. Conviction of certain crimes disqualifies applicants from licensing (CGS §§ 36a-801, 802, 803, 804). The law prohibits creditors from engaging the services of unlicensed consumer collection agencies (CGS § 36a-806(b)).

Prohibited Practices

State law also prohibits consumer collection agencies from engaging in certain practices. A few of these prohibitions are similar to those discussed above in the agency's relationship with debtors. But most of these relate to the agency's relationship with its creditor clients. Specifically, a consumer collection agency may not:

1. give legal advice or services or represent that they are competent to do so, institute judicial proceedings on behalf of others, or communicate with debtors in the name of an attorney or on an attorney's stationery, or prepare any forms or documents that only attorneys may prepare;

2. purchase or receive assignments of claims for the purpose of collection, or institute suit on such claims in any court;

3. assume authority on behalf of a creditor to employ or dismiss an attorney unless the creditor has given them written authorization;

4. demand or obtain a share of the proper compensation for services an attorney performs in collecting a claim, whether or not the agency has previously attempted to collect it;

5. solicit claims for collection under an ambiguous or deceptive contract;

6. refuse to return any claim at the creditor's, claimant's, or forwarder's written request if the claims are not in the process of collection after the payment of amounts owing to the agency;

7. advertise or threaten to advertise for sale any claim as a means of forcing payment, unless they are acting as assignee for the benefit of creditors;

8. refuse or fail to account for and remit to their clients all money collected that is not in dispute within 60 days from the last day of the month in which the money was collected;

9. refuse or intentionally fail to return to the creditor valuable papers deposited with a claim when the claim is returned;

10. refuse or fail to furnish, at the client's request, a written report on claims received from the client at intervals of not less than 90 days;

11. commingle money collected for a client with its own funds or use any part of a client's money in its own business;

12. add any charge or fee to any claim it receives for collection (or knowingly accept for collection any claim to which any charge or fee has already been added) unless the debtor is legally liable for it, in which case the fee may not be more than 15% of the debt amount actually collected;

13. use the term “bonded by the state of Connecticut,” “bonded,” “bonded collection agency,” or any similar combination, except that the word “bonded” may be used on the agency's stationery in type not larger than 12-point; or

Record Keeping and Business Operation

State regulations prescribe in more detail how the collection agencies must keep records, make them available to the banking commissioner, avoid commingling funds received from debtors with their own business operating funds, and notify the commissioner of any change in personnel or ownership (Conn. Agencies Reg. § 42-131d-1, 2). They also prescribe procedures and for voluntary termination of a consumer collection business (Conn. Agencies Reg. § 42-131d-4).

ENFORCEMENT

State

State law gives the commissioner power to examine the affairs of every consumer collection agency in the state to determine whether it has been or is engaged in prohibited practices (CGS § 36a-806).

The law gives the commissioner certain specified enforcement powers, including cease and desist orders and the right to take court action through the attorney general when he believes agencies are violating specific laws or otherwise engaging in unfair or deceptive practices (CGS § 36a-807, 808). The law gives the commissioner authority to issue regulations needed for the consumer collection agency business (CGS § 36a-809(a)).

The penalty for operating a consumer collection business without a license is a fine of up to $1,000, up to one year imprisonment, or both. For other violations, the penalty is a fine of up to $500, imprisonment of up to six months, or both (CGS § 36a-810).

Federal

The federal law is mainly administered by the Federal Trade Commission, which can use all of its general powers to enforce compliance. The law also gives certain enforcement powers to other agencies such as the Federal Deposit Insurance Corporation, the Comptroller of the Currency, the Federal Reserve Board, and the National Credit Union Administration, to the extent the entities they regulate are involved in debt collection activities (15 U. S. C. A. 1692l).

The federal law does not preempt state law on debt collection practices except to the extent they are inconsistent. A state law is not inconsistent if the protection it affords a debtor is the same as or greater than the federal law's (15 U.S. C.A § 1692n). States can request an exemption from the federal law (15 U.S.C.A. § 1692o). Regulations prescribe the criteria for determining whether a state law is inconsistent with the federal law. Connecticut's appears to be consistent with it (16 C.F.R. Sec. 901.1); the state has not requested such an exemption.

Federal Civil Liability

The federal law makes those who fail to comply with its requirements civilly liable to aggrieved individuals for an amount which is the total of:

The law lists the factors a court must consider, such as the frequency and persistence of the collector's noncompliance, its nature, and the extent to which it was intentional, the number of people adversely affected, and the collector's resources. But the collector is not liable if he can prove the violation was unintentional and resulted from a bona fide error. The law allows suits within one year from the date a violation of the federal debt collection law occurs in any appropriate district court against debt collectors regardless of the amount in controversy, or in any other competent court (15 U. S. C. A. § 1692k).

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