Laws Unfairly Treat Debt Collectors Differently on Credit Card Payments

Note: Moss & Barnett attorney Issa Moe also contributed to this article.

Have you ever been restricted from doing something everyone else was free to do?  Welcome to the life of a debt collector!  For fear of becoming the target of regulatory action or an opportunistic lawsuit brought under the guise of consumer protection, debt collectors are constantly limited in their ability to engage in business practices that are commonly accepted in other industries.

One particular area of extreme inequity is that debt collectors do not share the same ability as their business peers to freely and without reservation pass along transaction fees, or fees for processing particular forms of payment, to consumers.

What Are Transaction Fees And Who Can Charge Them?

Today, consumers are ever-increasingly choosing to do business using debit and credit cards.  And the reason is clear, paying with plastic is much more convenient.  This is particularly true in a society where electronic business has become the norm.  But convenience is not free.

When we as consumers elect to make certain forms of payment, such as debit card, credit card, and online and telephonic payments, the persons and entities with which we do business incur fees for processing those payments.  However, it is generally lawful and, thanks to a recent settlement involving Visa, MasterCard and several big banks, contractually permissible for governments, retailers and other merchants to pass along those fees to consumers in the form of transaction or convenience fees.

Transaction fees that businesses and the government itself pass along to consumers include fees to withdraw cash from certain automated teller machines, fees to make electronic payments to governments and utility companies, and fees to make debit or credit card purchases at convenience stores below a minimum purchase amount.  Ironically, some states charge a collection agency a fee to use a credit card for renewal of a collection agency license, yet those same states restrict the ability of the collection agency to pass fees on to the consumers who pay with a credit or debit card.

Tight federal and state regulations, and a consumer friendly interpretation thereof,  strip debt collectors of the same flexibility to pass along transaction fees that is afforded their peers in other business sectors.  There is simply no justification, as a legal or practical matter, for this inequitable treatment.

Laws Affecting The Payment Of Transaction Fees

The Fair Debt Collection Practices Act (FDCPA) is the federal law that regulates the collection activities of debt collectors.  In pertinent part, the FDCPA, at section 1692(f)(1), prohibits debt collectors from collecting “any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”   Some courts interpret this language as prohibiting debt collectors from passing transaction fees along to consumers for processing certain forms of payment on their debt, including credit card payments, while other courts hold that it does not.

In addition, several states enacted laws that expressly prohibit, or are interpreted as prohibiting, debt collectors from imposing transaction fees on consumers.  They include Connecticut, Colorado, Washington, and Wyoming, to name a few.

The Law Should Not Restrict a Debt Collector’s Ability To Pass Transaction Fees Along To Consumers

There are several reasons why the FDCPA and similar state laws should not be interpreted as prohibiting debt collectors from passing transactions fees along to consumers.  First, a debt collector generally does not itself process credit card or other electronic payments.  Rather, the collector offers those payment options in addition to no-cost options as a convenience to consumers.  If a consumer pays electronically, the collector generally retains a third party that charges a fee to the collection agency to process the payment.  Since the collector is not itself processing the electronic payment and collecting a transaction fee, but merely passing a third party’s fee through to the consumer, it is not engaging in potentially prohibited conduct.

Second, a transaction fee is not incidental to the consumer’s principal obligation.  Rather, it is a separate expense that a consumer chooses to undertake when he or she elects to pay a debt electronically.  The debt itself remains the same regardless of whether the consumer chooses a fee-based or no-cost payment option.  Put differently, a transaction fee adds nothing to the underlying debt.  To the contrary, it is a fee for a separate transaction voluntarily entered into by the consumer.  For that reason, it is irrelevant whether a transaction fee is charged by a third party or, instead, by the debt collector itself for processing the electronic payment.  Either way, the fee should not be construed as prohibited by the FDCPA or similar state laws.

Restricting a debt collector’s ability to freely pass transaction fees along to consumers may do consumers more harm than good.  Indeed, it would force collectors to bear the cost of processing credit card or other electronic payments, which would discourage the offering of electronic payment options to consumers.  Collectors may eliminate credit card payment options altogether.  If that were to happen, cash-strapped consumers who might otherwise be willing and able to pay valid debt using, for example, a credit card would be left with no means of doing so.

Conclusion

Warranted or not, the stigma and heightened public scrutiny of the collection industry ensures that debt collectors will never be the belle of the ball.  But that does not mean they should be stripped of the freedom to compete fairly and equitably with their peers in other business sectors.

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John K. Rossman is a shareholder and Chair of the Creditors’ Remedies Practice Group at Moss & Barnett, P.A. Mr. Rossman is a nationally acclaimed authority on the Fair Debt Collection Practices Act and the labyrinth of laws that impact the debt industry. He is a counselor and advisor to national and international companies and noted for his intelligent, creative and successful representation of collection agencies, debt buyers, creditors and fellow attorneys in cases across the country.

Issa K. Moe focuses his practice in Moss & Barnett’s creditors’ remedies and bankruptcy group.  He has experience representing individual and commercial debtors, unsecured and secured creditors, trustees and other parties-in-interest in bankruptcy proceedings and in litigation, both inside and outside the bankruptcy forum.  Mr. Moe’s practice also includes the defense of debt buyers and debt collection agencies in connection with claims under the Fair Debt Collections Practices Act and Fair Credit Reporting Act.

This publication is provided only as a general discussion of legal principles and ideas. Every situation is unique and must be reviewed by a licensed attorney to determine the appropriate application of the law to any particular fact scenario. If you have a legal question, consult with an attorney. The reader of this publication will not rely upon anything herein as legal advice and will not substitute anything contained herein for obtaining legal advice from an attorney. No attorney-client relationship is formed by the publication or reading of this document. Moss & Barnett, A Professional Association, assumes no liability for typographical or other errors contained herein or for changes in the law affecting anything discussed herein.