Are Early Out Services Banned in Texas? An Examination of How Texas Debt Collection Requirements Apply to Early Out Entities

The term “early out entity” is generally defined as a third party that performs business office services (“extended office services” or “EBO services”) on behalf of hospitals and other medical service providers on non-delinquent patient accounts.  An early out entity receives the accounts for servicing from the hospital or medical service provider prior to the accounts being in default and does not perform collection services on accounts deemed to be in default.  The early out entity typically services the accounts in the name of the hospital or medical service provider. Based on a plain reading of the above law, Texas likely prohibits early out entities from engaging in EBO services in the name of the hospital or medical service provider.  Read on to learn why.

Early Out Entities are Likely Considered Debt Collectors Under the Texas Finance Code

The Texas Debt Collection Act (“TDCA”) distinguishes between a “creditor”, “debt collector” and “third party debt collector.”  Tex. Fin. Code § 392.001(3), (6) and (7).   The TDCA defines a “creditor” as a “party, other than a consumer, to a transaction or alleged transaction involving one or more consumers.  Id. at (3).  A “debt collector” is a “person who directly or indirectly engages in debt collection . . . .”  Id. at (6). “‘Debt collection”, in turn, means an action, conduct or practice in collecting, or soliciting for collection, consumer debts that are due or alleged to be due a creditor.”  Id. at (5).  There is no qualification that the consumer debt must be in default or delinquent. 

Significantly, Texas considers both debt collectors and creditors to be “debt collectors” for the purposes of the TDCA.  Boles v. Moss Codilis, LLP, Civil Action No.  SA-10-CV-1003-XR, 2011 WL 2618791, at *4 (W.D. Tex. Jul. 1, 2011) (noting that “the TDCA’s definition of a debt collector is broader than that under the FDCPA, and includes creditors seeking to collect debts originated by them”).

On the other hand, a “third party debt collector” is defined in the TDCA by reference to the definition of “debt collector” under the FDPCA.  Id. at (7).  The FDCPA’s definition of “debt collector” excludes any person who collects or attempts to collect debt that “was not in default at the time it was obtained by such person.”  15 U.S.C. § 1692a(6)(F).  Thus, because most early out entities are not “debt collectors” as that term is defined under the FDCPA, they are likely not “third party debt collectors” under Texas law.   

Based on the foregoing, most early out entities meet the definition of “debt collector” under Texas law and are subject to the requirements in Title 5 of the Texas Finance Code (“Protection of Consumers of Financial Services”).

Prohibited Practices under the Texas Finance Code  

Texas Finance Code § 392.304(a)(1) provides as follows:

Except as otherwise provided by this section, in debt collection or obtaining information concerning a consumer, a debt collector may not use a fraudulent, deceptive, or misleading representation that employs the following practices:

(1)  using a name other than the:

(A) true business or professional name or the true personal or legal name of the debt collector while engaged in debt collection; or

(B) name appearing on the face of the credit card while engaged in the collection of a credit card debt.

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(4) failing to disclose clearly in any communication with the debtor the name of the person to whom the debt has been assigned or is owed when making a demand for money;

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(6) using a written communication that fails to indicate clearly the name of the debt collector and the debt collector's street address or post office box and telephone number if the written notice refers to a delinquent consumer debt;

(7) using a written communication that demands a response to a place other than the debt collector’s or creditor’s street address or post office box…

What This Means for Early Out Entities

Based on a plain reading of the above law, Texas likely prohibits early out entities from engaging in EBO services in the name of the hospital or medical service provider.  This creates a challenge for early out entities regarding having to advise a patient that a communication is from a debt collector, while not misleading the patient to believe that the account has been placed with a collection agency.

There is limited guidance from case law and state regulators regarding how best to comply with the Texas requirements while also minimizing confusion for patients.  With the expected increase in scrutiny against the financial services industry under the new administration, I recommend that early out entities confer with an attorney before conducting EBO services in Texas.[1]

[1] There are several other states with laws to the same effect as Texas.