What is the Creditor Liability under the FDCPA?

When a debt collector or another entity violates the Fair Debt Collection Practices Act (FDCPA), a question arises: who is liable- the debt collector or the creditor?  On many occasions, a company can be held liable for its agents’ or employees’ actions and violations, or in other words, it holds vicarious liability.  Vicarious liability occurs when a principal or a creditor has the responsibility or the ability to control actions of the agent or debt collector which committed the violation.  Even though creditors are exempt under the FDCPA for liability, creditors can still be sued for being vicariously liable either for controlling debt collection partners too much, or for negligent hiring or supervision of a collection partner.  It’s a tough spot to be in and it is hard to maintain a safe balance, but let’s look at each of these vicariously liabilities closer. An “agency relationship” may be established if creditors are exercising too much control over a debt collection partner.  Once this relationship is established, it imputes the actions of the debt collector upon the creditor, thus making the creditor vicariously liable according to the principles of agency law. This issue may be solved by hiring an independent contractor, whose actions generally will not be imputed upon the principal (i.e., the creditor).  However, when the rubber hits the road and the violation of the FDCPA occurs, an independent contractor may be considered an agent of the creditor if the creditor exercised too much control over the contractor.

There are certain practices creditors must be aware of that increase or decrease creditor liability.  For example, if the creditor controls the content of communication between the collection agency and the consumer; if the consumer’s payments go to the creditor; or if the agency has no authority to negotiate debts- these practices will increase creditor liability.  On the other hand, practices that will decrease creditor liability include, among others, cases where the agency provides follow-up services; where it retains and manages information about the customers, or where there is a direct contact between the consumer and the agency.  Therefore, collectors should try to have less control over the collection process and legal relationships since it will decrease their chances of being vicariously liable.

Another type of vicarious liability a creditor may incur is liability for the negligent hiring or supervision of a collection partner.   The Consumer Financial Protection Bureau (CFPB) - a federal agency that enforces the FDCPA- holds responsible any company they supervise for employees hired by that company to do work on its behalf.  Basically, the CFPB is saying that the creditors must oversee what the agencies are doing and that the creditors can be held responsible for the agencies’ and its employees’ actions.   Since the CFPB holds the creditor responsible for what the collection agency does, the creditor should know the agency’s policies and procedures very well.

This makes it hard for collectors to keep a balance between not controlling their collection partners too much to avoid vicarious liability and yet overseeing these agencies enough to avoid liability for negligent hiring.  Since the violations of the FDCPA may cause serious repercussions for creditors, creditors must cover all of the above-mentioned circumstances by carefully creating their business contracts and by being proactive with their policies.  The price is too high to pay, especially if FDCPA violations lead to class-action lawsuits.

For more information, please contact Joseph Messer at jmesser@messerstrickler.com or by calling (312) 334-3440.