It can be tempting to creditors to add interest, services fees and even collection costs to delinquent accounts. However, the addition of these fees could generate unwanted legal attention if not done properly. As a matter of fact, the largest number of consumer class action claims arise from the improper addition of fees to a debt during the collection process. In consumer collections, the addition of any interest, collection costs, services fees or other expenses incidental to the original debt is permitted when “such amount is expressly authorized by the agreement creating the debt or permitted by law.” 15 U.S.C.1692f (1) [§808(1)] (emphasis added). Nonetheless, collection laws at the state level also speak to this issue. Therefore, it is extremely important for both creditors and collection agencies to consider both state and federal law, not just when the accounts become delinquent, but also when drafting the contracts that create the debts.
In its Official Staff Commentary on the FDCPA, the Federal Trade Commission (FTC) explained that “a debt collector may attempt to collect a fee or charge in addition to the debt if either a) the charge is expressly provided for in the contract creating the debt and the charge is NOT prohibited by state law, or b) the contract is silent but the charge is otherwise expressly permitted by state law. Conversely, a debt collector may not collect an additional amount if either a) state law expressly prohibits collection of the amount or b) the contract does not provide for collection of the amount and state law is silent.”
The FTC has also noted that even in those situations where a contract between a credit grantor and the consumer expressly permits the addition of a “high collection charge”, the amount of the charge could be considered unreasonable and thus, unenforceable. It is likely that if a court is required to consider what “reasonable” charge is, it would examine the actual cost incurred by the collection agency or creditor to collect the debt. Many times, the actual cost of collection is much lower than the collection fee charged by the agency. Therefore, it is important that the contract creating the debt specifies the amount of the collection charge.
Laws and regulations on collection costs, interest, service fees or other expenses incidental to the original debt differ in every state. There are several states where the laws or regulations are silent as to whether collection agencies may add interests, collection charges and fees, such as Alabama, Alaska, Florida, Indiana, Kentucky, Maryland, Montana, Ohio, and South Dakota.
Other states place unique restrictions on the collection of costs, interest and other fees. For instance, the state of Colorado allows a consumer credit agreement to provide for the payment of reasonable attorneys fees, but caps the fees at a percentage of the unpaid debt. Virginia and Illinois actually allow the imposition of interest at a statutory rate on open-ended credit plans under certain circumstances. Louisiana bars a creditor from contracting with a consumer to pay collection agency fees incurred to collect on the consumer’s debt.
With the vast differences in state laws and regulations, it is imperative that both creditors and the collection agencies check with qualified counsel regarding laws and regulations for the states in question.