Three Overlooked Traps for First-Party/Early-Out Servicers ("The Debt Collection Drill")

First-party and early-out servicing provides an enhanced customer service experience and greater responsiveness for consumers. These qualities make first-party and early-out servicing beneficial for creditors, as well as consumers. However, as the prevalence of this type of servicing increases, consumer attorneys and regulators seek to find ways to apply traditional debt collection laws and statutes to first-party and early-out servicing.

In the latest episode of The Debt Collection Drill, Moss & Barnett attorneys John Rossman, Mike Poncin, and Dave Cherner discuss risks for first party and early out servicing arising from the Federal Trade Commission DeMayo Opinion, discuss specific state licensing and disclosure requirements (24 states and jurisdictions may require early-out servicers to obtain a collection agency license), and also address possible Consumer Financial Protection Bureau (CFPB) rulemaking to modify the definition of default, as determined by meetings that Mr. Rossman and Mr. Cherner have attended with the CFPB through the Consumer Relations Consortium.


  • Mike Poncin: Welcome everybody to another edition of The Debt Collection Drill. I'm Mike Poncin and with me as always is John Rossman Chair of our Creditors Remedies Department here at Moss & Barnett. Along with a special guest that John will introduce.
  • John Rossman: Thanks Mike. We have Dave Cherner her as well. An attorney in our office. We're talking today about three things that early out first party companies need to know that they probably don't know. Mike the reason that we wanted to do this particular episode is because about three years ago InsideARM started a series of annual conferences called the First-Party Conference and each year I have attended and spoken and each year it has grown a little bit bigger in attendance and a lot more interest is growing around first party. Mike I think there are some common misperceptions about first party. What it is and what it is not and also what some of the guardrails are as far as what you need to do. So Mike I know the starting point for any discussion about first party begins with the DeMayo opinion and that's the Federal Trade Commission opinion from May 2002. Good heavens that's fifteen plus years old now but it is kind of the starting point. Mike do you want to summarize DeMayo and the two ways in which a company may act to service debts without being deemed to be a debt collector pursuant to the DeMayo opinion.
  • Mike Poncin: As you mentioned, there are two instances. There are two exceptions to the rule of whether or not you are a debt collector and the first one would be is the debt in default. If the debt is not in default, then of course the FDCPA does not apply. The other one is are you a de facto employee of the creditor and to get there you have to look at a certain amount of control and various factors. It's not always the easiest standard to meet when you get down to it John.
  • John Rossman: You know it's interesting a lot of first party companies that I speak with and Dave and I spoke at the First-Party Conference earlier this month. It was held in Fort Worth, Texas. A lot of the first party companies with which we speak talk about using this not in default exception. Mike I want to point out and specifically some language that is in the DeMayo opinion that I think is often overlooked. A lot of times companies will include in their contracts, rightfully so, first party companies will include in their contracts with the creditor, typically a healthcare provider or other company, a provision that states that the creditor will not place an account that is in default and case law is crystal clear that that is sufficient to assert that you are not a debt collector. That you're not subject to the FDCPA and there is great case law on point. There is some language in the DeMayo opinion I want to share and it's talking about this default exception. The FTC states: "We believe that in the absence of a contractual definition or conclusive state or federal law, a creditor's reasonable written guidelines may be used to determine when an account is in default. We note that in evaluating guidelines to determine reasonableness we would consider the entirety of the circumstances including, but not limited to, whether the guidelines are applied consistently and whether they are designed for administering accounts rather than for circumventing the FDCPA. For example, we would not consider a set of guidelines reasonable if, under those guidelines, the same account were deemed in default for one purpose such as determining whether the creditor may accelerate the loan but not in default for purposes of determining whether a third-party collector is a debt collector under the FDCPA." A little lengthy quote there Mike but I think the takeaway from it is while the provision in the contract stating that accounts that are in default will not be placed, I think this provision also gives some other guidance for first-party companies as far as really taking the additional step to protect themselves to insure that they have done their due diligence with their clients to insure that the client's policies and procedures and definition of default is in line with something that is reasonable.
  • Mike Poncin: You are 100% right and it makes sense. I think with general credit card debt we look at that being charged off six months later so it's something to keep in mind. This language goes to the fact that you can't get credit card that is a year and a half old and say that it's not in default as deemed under the FDCPA just because it's in the contract. There is a certain level of reasonableness that goes into it which hopefully if you get to that point it's not a jury question and you can convince a judge that your procedures and the contract language is reasonable.
  • John Rossman: I know there was the Pollack case that came down recently within the past few months in which a company was working in the first party context for a credit card provider and on a motion to dismiss the plaintiff had argued that the letters that were sent in the name of the creditor were actually a rouse and were actually being sent by a debt collector and on a motion to dismiss the court denied the defendant's motion to dismiss, the servicers motion to dismiss, and so we really need to do more investigation into whether or not these letters came from the creditor or whether they came from the first party servicer. So I know there has been more litigation on this issue and Mike it's something that we're definitely, any company that's doing first party wants to take a look at its contracts and wants to take a look at those policies and procedures of its clients to determine whether everything is in compliance with what the law requires. Mike the second issue that I think is really important for first party servicers to be cognizant of is state laws. Dave I know this is something that we had discussed at the First-Party Conference just a few weeks ago. Dave I know there are some state laws regarding licensing, regarding automated dialers that apply. Would you like to briefly discuss those please.
  • Dave Cherner: Sure, happy to. So the first is licensing. Just like the FDCPA when it was passed, I don't think that Congress really envisioned that really understanding what first party collections would be. The idea was we're going to regulate third party. Agencies create a legal framework for that and as we all know over time the landscape has changed dramatically and so trying to fit this old law to apply to new practices. The same is true at the state level. Whether it be licensing the majority of states that have a licensing framework for the collection space were promulgated many many years ago and have been just overlaid wither changes over the years. Solicitation requirements that apply to different types of use of telephony technology and operational requirements simply have not really anticipated or envisioned the change in how collections would operate today. That creates a lot of ambiguity. A lot of risk. So from a licensing perspective even though you may think as a default while a licensing requirement only applies to a third party, that simply is not true. There are states that require licensing for an entity that is collecting potentially in the name of a creditor client. There are states that require licensing if you are collecting delinquent or not in default debt and states vary. Minnesota is a good example. Minnesota has a very broad definition of what it means to be a debt collector. Incredibly broad and does cover entities that are collecting. They're doing, for example, potentially billing work. Collecting on debt that's not in default and other states are like that as well. So it's real important that once you identify the contract, once you have that in place, look to the provisions that Mike and John that you've been describing to then look at okay what's our licensing obligation. From an operational perspective the same thing would apply there. There are states that require the creditor to send out unique verification validation requirements. Again that is going to far exceed what a typical creditor understands to be their obligation to comply. And then lastly, would be autodialer provisions. Similar to the TCPA at one point we all thought oh this doesn't apply to the collection industry. We all then quickly came to see that how quickly that changed. The same can apply at the state level. There are about forty-five plus states with requirements on how an autodialer can be used. A number of those states apply those laws to solicitation and non-solicitation business practices and then a number of them then have unique exemptions that may exempt your practice from the law. But again, it's important to undertake that survey analysis, look at your business practice so that you can have your particular controls fit in with what's required under applicable state or local law.
  • John Rossman: And Dave as I understand it, there are twenty-four states that may require a first-party company to obtain a license. I won't rattle off twenty-four different states here but I'll just read off some of the highlights. Certainly Florida is one of them. You mentioned Minnesota. We know Indiana and of course New York City, Washington, West Virginia. There are a number of them. So a number of states where you really need to be cognizant of those licensing requirements. In addition, regarding those requirements as far as a validation notice or a mini miranda, here again, you're thinking well we're first party we don't need to provide a validation notice or a mini miranda. A number of states that require those including, for instance, the city of Chicago as well as Massachusetts and Michigan, New York City. As far as the mini miranda, here again, Connecticut, District of Columbia, New Your City. So a number of large jurisdictions where even if you're doing first party you need to take a look at the full scope of those state laws. Mike I want to throw it back over to you to hit our final point which is potential federal regulation of the first party space. And I know you mentioned early on the exception to the definition of debt collector that is found in DeMayo. What's your take on the ability under the FDCPA of a regulator such as the CFPB to regulate first party.
  • Mike Poncin: Well I think they've shown they can do whatever they want to do. Right? So I would say that their able to do it and I guess I was almost going to throw it back and ask this question, de facto employee exception. If you're operating as you know the creditor. You're at the creditor's location. You're making calls under the creditor's names. Are there instances where the company doing that would have to be licensed or comply with these state rules even though the original creditor would not?
  • John Rossman: You know that's a really good question. It all depends on the definitions, these states definitions. I look at like Connecticut, for instance, which is one that talks about who you work for, whose name you're collecting in, so there is a lot of different factors that go into it. I know Dave mentioned Minnesota as another good example where you're collecting for another. So I think you need to get really granular and if you're using the defacto employee exception, are those de facto employees pulling a paycheck from the servicer or are they pulling a paycheck from the creditor and if they're pulling a paycheck from the servicer is there a proper contractual agreement in place to subcontract those employees to the creditor. It's not a one size fits all but certainly with respect to these states with these licensing requirements you really need to take a look at how that relationship is structured to determine whether or not the licensing requirements have been triggered.
  • Mike Poncin: Now John I know you've had some meetings where you've met with CFPB personnel and what not. Have they discussed the DeMayo opinion? Has that come up at all?
  • John Rossman: Yeah, it's a great question. So at the very first First-Party Conference which was a few years back now we had a representative from the CFPB and a representative from the FTC discussing the DeMayo opinion. I was on a panel discussing it there. Since then I've had meetings with the CFPB and I know Dave you've been in on a number of those meetings as well. We also had that meeting with Director Cordray back in January of this year and one of the topics we discussed was first party. The sense I get from the CFPB and specifically from Director Cordray in the meeting that we had with him was at some point the CFPB is going to regulate first party and at some point the CFPB is going to specifically focus on the in-default exception which I read that lengthy dissertation from the DeMayo opinion from fifteen years ago. I believe that the CFPB is going to update that in-default exception. I don't know how they're going to do it and this is something we discussed is that well do you want to set it at thirty days or do you want to set it at six months. You know certainly for a hospital debt, for instance, and this is the example I gave you don't want to say a debt is in default thirty days after service because in many instances a medical debt can take six months to a year for an insurance company to pay a hospital bill. So you don't want consumers being harmed by having debts deemed to be in default too quickly but at the same time the CFPB's point is they want to be able to exercise some control and some supervision over first party. It's a fascinating topic. It's something that as we see more creditors and more servicers moving to this area we're going to continue to see more lawsuits from consumer attorneys and more regulatory oversight. We are out of time for today. I'd like to thank Mike for another great episode. I'd also like to thank Dave for stepping in on short notice to assist. And I'd like to thank our Executive Producer Jodi Newsom and we look forward to speaking with you next time. Thank you.

Visit the website for this podcast at the Debt Collection and follow us on Twitter @CollectDrill. This program does not create an attorney/client relationship between Moss & Barnett, a Professional Association, or any attorney appearing on this program and any listener. Please remember that we can only give general information and every case is unique. Always check with your individual attorney for any specific legal concerns.