- Contracts Must Be Clear When Adding Percentage-Based Collection Fees to Delinquent Student Accounts
- March 31, 2014 | Author: Sharon Pietras
- Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Cleveland Office
Each school has an obligation to honor the terms set forth in their enrollment contracts with students, particularly when it comes to adding collection fees to delinquent accounts. Although the school, as an original creditor, may not be subject to the Fair Debt Collection Practices Act (FDCPA), the Consumer Financial Protection Bureau (CFPB) can subject certain financial institutions to an FDCPA-like investigation in order to prohibit unfair, deceptive or abusive acts on a consumer.1
Adding percentage-based collection fees is not in and of itself an "unfair practice" under the FDCPA,2 provided these fees are expressly authorized within the governing contract and are permitted by state law.
In order to remain in compliance with both statutory and federal regulations, a school's first step is to review the relevant state law regarding the addition of collection fees. Some states, like Tennessee, prohibit them entirely.3 Ohio, however, like many other states, has refrained from enacting any statutory authority either permitting or prohibiting collection fees. Even when silent, most states will require that all additional fees must meet a "reasonableness" standard; a standard that is neither defined by the FDCPA nor by statute but determined by the courts on a case-by-case basis.4 Lastly, there are states like Connecticut and Illinois which set forth specific limitations and conditions to adding fees.5
Next, schools may find it beneficial to thoroughly review their enrollment contracts and in some cases redraft them in order to remain in compliance when adding these fees. In a precedent setting decision, the Eighth Circuit Court of Appeals in Kojetin v. C U Recovery, Inc.6 found that the collection agency violated the FDCPA by collecting a percentage based fee when the contract only obligated the consumer to pay the "costs of collection." As a result of the language in the contract, the court held the consumer liable for the actual costs of collections.
Similarly, and more recently, on January 2, 2014, the Eleventh Circuit Court of Appeals in Bradley v. Franklin Collection Service, Inc.7 reaffirmed the Kojetin court's strict interpretation when addressing collection fees in contracts. The court found that the collection agency violated the FDCPA when it added and collected a percentage-based fee on defaulted medical bills. The contract in that case broadly obligated the consumer to pay "all costs of collection." Since the addition of a 33.3% collection fee was not specifically set forth in language between Bradley and the medical provider, the agency violated the FDCPA by collecting anything above the actual costs of collection.
Bradley argued, and the court agreed, the 33.3% collection fee charged by the collection agency was really an attempt to collect liquidated damages8 not specifically provided for in the governing contract. In efforts to clarify the distinction between collection fees and liquidated damages, the Eleventh Circuit, relying on a Seventh Circuit opinion, reiterated:
"...the following contractual provision may allow the imposition of a percentage-based collection fee when a delinquent account was referred to a third-party collection agency: 'You agree to reimburse us the fees of any collection agency, which may be based on a percentage at a maximum of 33% of the debt, and all costs and expenses, including reasonable attorney's fees, we incur in such collection efforts.'" (emphasis added)9
To be sure, there has never before been a more regulated industry as the one a school enters when collecting on delinquent student accounts. It is imperative now more than ever to protect one's reputation and safeguard the collection agencies and firms against costly litigation when pursuing collection fees. This certainly can be done by following state law and with carefully selected language specifying the fees within the enrollment contracts.
1 CFPB Bulletin 2013-07, July 10, 2013, Subject: Prohibition of Unfair, Deceptive, or Abusive Acts or Practices in the Collection of Consumer Debts, http://files.consumerfinance.gov/f/201307&under;cfpb&under;bulletin&under;unfair-deceptive-abusive-practices.pdf
2 The FDCPA §1692f(1) only prohibits "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."
3 Tennessee prohibits all collection fees pursuant to Tenn. Code Ann. §62-20-115(b)(2)
4 Although Ohio is silent as to collection fees, it specifically prohibits the addition of attorney fees in collection matters. See Moxley v. Pfundstein, 801 F. Supp. 2d 598, 604 (N.D. Ohio 2011)
5 E.g. In Connecticut [Conn. Gen. Stat. § 36a-805(a)(12)] and Illinois [225 ILCS 425/9(a)(29)] the collection fee is limited to 15% of the amount collected and must be provided for within the governing contract
6 Kojetin v. C U Recovery, Inc.,212 F.3d 1318 (D. Minn. Feb. 17, 1999)
7 Bradley, et. Al v. Franklin Collection Service, Inc., 13-12276, Eleventh Circuit Court of Appeals (January 2, 2014)
8 Liquidated Damages as defined by Black's Law Dictionary is "Cash compensation, agreed to by signed, written contract for breach of contract, payable to the aggrieved party. The contract succinctly specifies what actions, or omissions, constitute a breach. To be legally enforceable, the contract's nature makes damages circumstantially reasonable and difficult to determine. Otherwise, a court could interpret the specified amount as a fine, being in the contract primarily to force proper performance, and not to compensate injury. Under these conditions, the court views damages as 'unliquidated' to be assigned by the court based on the case's merits alone." Law Dictionary: What is LIQUIDATED DAMAGES? definition of LIQUIDATED DAMAGES (Black's Law Dictionary)
9 Relying on a 7th Circuit Decision, the 11th Circuit quotes Bradley, et. Al v. Franklin Collection Service, Inc., 13-12276, Eleventh Circuit Court of Appeals (January 2, 2014)) quoting Seeger v. AFNI, Inc., 548 F.3d 1107, 1110, 1113 (7 Cir. 2008), see also Boatley v. Diem Corp., No. CIV. 03-0762-PHX-SMM, 2004 WL 5315892, *5-6 (D. Ariz. Mar. 24, 2004)