An Inconvenient Truth About Convenience Fees

Editor's Note: This article previously appeared on the Ontario Systems Blog and is republished here with permission.

The typical convenience fee conversation between a third-party collection agency client and its legal counsel usually begins like this:

Third-party agency client: Can I legally charge a convenience fee or not?
Attorney: It’s complicated.
Third-party agency client: I’m not paying you to tell me it’s complicated. 
Attorney: Let’s talk.

The terms convenience fee, processing fee, administrative fee and payment fee all refer to a charge to the consumer for making a certain type of payment. Such a fee is most commonly associated with a debit card or credit card payment but can also be used to describe a bank account transfer or even a paper pay-by-phone check. For purposes of this article, the term “convenience fee” will be used in connection with a charge to the consumer for initiating or authorizing a credit card or debit card payment transaction. This article does not address state surcharge or cash discount laws.

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The ability to charge fees associated with credit card and debit card transactions is regulated by VISA MasterCard Rules and the specific rules of each card company as outlined in the merchant agreement. The ability for third-party debt collectors to charge fees associated with credit card and debit card transactions is regulated by state laws, the Fair Debt Collection Practices Act (FDCPA) and consent orders and Guidance Bulletins published by the Consumer Financial Protection Bureau (CFPB).

This workflow analysis focuses on the charging of convenience fees in connection of the collection of debt as that term is defined in the FDCPA. There are two important provisions in the FDCPA governing convenience fees. The first explains the types of debts that trigger convenience fee issues and the second explains the prohibited convenience fee practice.

• Fair Debt Collection Practices Act 15 U.S. Code § 1692a – Definitions Debt. As used in this subchapter …

  •  (5) The term “debt” means any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.

• Fair Debt Collection Practices Act 15 U.S. Code § 1692f – Definitions Unfair practices. As used in this subchapter …

  • A debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section:

    (1) The collection of 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.

At this point, the convenience fee conversation between a third-party collection agency client and its legal counsel can go south:

Third-party agency client: How am I supposed to know whether the agreement between the consumer and my clients permits convenience fees?
Attorney: It’s your job to know if you want to charge a convenience fee.
Third-party agency client: What about that state law thing you mentioned, “if permitted by state law?” Which states permit convenience fees? 
Attorney: It’s complicated.

Not surprisingly, agencies that charge consumers convenience fees for paying by credit card or debt card are engaging in one of the most high-risk practices associated with debt collection. The law is murky. Mistakes give rise to huge class action lawsuits. Most states prohibit them, a few are silent, and fewer still, permit them. Worse yet, consumer attorneys actively troll for such law violations.

So, what is the easy answer? Agencies lacking a clear legal basis to charge consumers a convenience fee should not charge consumers a convenience fee. But wait, there’s more. What if another party charged the consumers a convenience fee?

The following scenarios drive home the difference between the workflow triggered when the third-party debt collector charges the convenience fee to the consumer, and the workflow triggered when an independent payment processor charges the convenience fee to the consumer. 

Scenario I – Workflow for Direct Charge 

Third-Party Debt Collector Charges the Convenience Fee:

• Determine if the card rules governing the use of the card, permit, restrict or prohibit the charging of convenience fees for any reason and identify whether such reasons apply to the collection agency.
• Determine if the original credit agreement between the creditor and the consumer permits the collection agency to charge the consumer a convenience fee directly.
• If the collection agency is permitted to charge the convenience fee directly, determine if any state law prohibits the collection agency from charging the consumer a convenience fee directly.
• If state law does not prohibit the collection agency from charging the consumer a convenience fee directly, present the consumer with an option to pay that does not include any sort of convenience fee charge. Present this option before the consumer agrees to any other form of payment having a convenience fee charge associated with it.
• The requirement to present the free option must be addressed regardless of the form of interaction with the consumer. This means the free option and the requirement to present the free option before the consumer agrees to any other form of payment having a convenience fee associated with it, applies to web sites, payment portals, IVR scripts, live interaction, text messages, emails and all other forms of written and verbal communications.
• The amount of the payment and the amount of the convenience fee should both appear on the consumer’s monthly credit card or debit card statement as separate items charged to the collection agency.*
• Disclose the convenience to the consumer prior to completing the transaction so they can cancel the transaction.
• Charge only a flat fee regardless of the transaction amount. The fee cannot be a percentage of the transaction [apart from government debt and approved government merchants].
• Be aware, many card agreements prohibit anyone from charging a fee on recurring payments.
• Charge the same convenience fee for all card brands and payment types that have a convenience fee associated with their use.
• When processing the payment, the collection agency will advise the processor of both charges.
• Be sure to retain a copy, or access to a copy, of the consumer agreement and any voice, web or digital record should the convenience fee charge be challenged and retain the copy according to the agency’s document retention policy.
  *Please note: Some card agreements require the convenience fee and the payment amount to appear as a single charge by the collection agency. For this reason, a general statement cannot be made which applies to all card agreements.

Scenario II – Workflow for Indirect Charge

Independent Payment Processor Charges the Convenience Fee:

• Determine if the card rules governing use of the card, permit, restrict or prohibit the charging of convenience fees for any reason and identify whether such reasons apply to the scenario where the collection agency will select an independent payment processor that will charge the fee to the consumer.
• If the creditor permits the collection agency to select an independent payment processor that will charge the consumer a convenience fee, determine if any state law prohibits the collection agency from presenting this payment option to the consumer.
• Identify an independent payment processor that will charge the consumer to process payments.
• Present the consumer with an option to pay that does not include any sort of convenience fee charge. Present this option before the consumer agrees to any other form of payment having a convenience fee charge associated with it.
• The requirement to present the free option must be addressed regardless of the form of interaction with the consumer. This means the free option and the requirement to present the free option before the consumer agrees to any other form of payment having a convenience fee associated with it applies to websites, payment portals, IVR scripts, live interaction, text messages, emails and all other forms of written and verbal communications.
• If the consumer chooses to pay using a method having a convenience fee associated with it, direct the consumer to the independent payment processor.
• This hand-off to the independent payment processor can take place via website, payment portal, IVR script, live interaction, text message, email and any other form of written and verbal communication.
• The collection agency will record and track the amount of the payment in its application. No record of any fee charged by a third-party processor will be retained by the collection agency.
• Disclose the convenience fee option to the customer prior to completing the transaction so they can cancel the transaction.
• The independent payment processor may only charge a flat fee regardless of the transaction amount. The fee cannot be a percentage of the transaction [apart from government debt and approved government merchants].
• Be aware, many card agreements prohibit anyone from charging a fee on recurring payments.
• The amount of the payment and the amount of the convenience fee should each appear on the consumer’s monthly credit card or debit card statement [e.g. Visa, MasterCard, etc.] as separate items. As a practical matter, the payment will show as having been charged to the collection agency and the convenience fee will show as having been charged to the independent payment processor on the consumer’s statement.

Consultation with independent legal counsel is a necessary step to the convenience fee decision. An appreciation for the distinction between a fee charged directly by a third-party collection agency and a fee charged by the payment processor is equally important. Focus on the consumer’s experience, make sure your scripts, documentation, records and disclosures clearly support the method you settle on using. Don’t blur the lines and remember to exercise due diligence when choosing your payment processors.