Defending Fair Debt Collection Practices Act and Fair Credit Reporting Act Litigation
Debtors pursued by companies that have purchased their delinquent debt often file a counter claim or other lawsuit against the owner of the debt.
Here are some important considerations to keep in mind when defending lawsuits involving delinquent credit card debts.
Why Consumers Choose to Use Credit Cards Rather Than Cash
The banking industry introduced their credit card product in the late 1960s in order to provide the public with a more convenient means of purchasing goods and services. Numerous advantages resulted, including: (1) Consumers can carry less cash – reducing risk of loss or theft – and still make purchases; (2) Consumers do not have to keep returning to their bank during the month to replenish their wallet cash; (3) Consumers can make one payment a month that covers purchases and other transactions for many merchants; (4) Consumers can make immediate purchases from merchants outside of their home market area without having to wait on the time that would be required in order to send a check; (5) Merchants can make additional sales to consumers who might not have the cash on them at the time they want to make a purchase; and (6) Commerce is speeded up significantly, i.e., purchases are speeded up and merchants can turn their merchandise faster. These are the primary reasons that consumers and merchants like credit cards as a medium of purchase.
If a consumer has no credit history, little credit history, or a history of some credit problems, then the consumer may have to obtain their credit card from one of the card issuers whose business model specializes in providing credit to people with these problems, or people with other past or present problems managing credit. Due to the increased risk taken on by the lender in providing these credit card accounts, these lenders charge higher interest rates and fees than lenders charge consumers who are less risky borrowers.
When these high risk credit card accounts become delinquent, it is the normal business practice of the original card issuer to exhaust all of their collection efforts, and often then sell the debt to a debt purchasing company at a marked down price. Then, it becomes the job of the company that purchased the debt to collect the debt, often involving the initiation of litigation.
The Sale of Delinquent Debt
Two important points need to be kept in mind at this stage of the life of a delinquent debt sale:
1. The debt purchaser should document as fully as possible the chain of title to the debt. That is, the purchaser needs to be able to say when and where the credit card account originated, and the parties to whom it subsequently was sold, up to the point that the present owner that is bringing the collection lawsuit acquired it.
2. In addition to validating the debt by providing the chain of title information just mentioned, it is necessary that the debt purchaser be able to document and verify the exact amount of the debt owed at some particular time, normally the time that the debt was purchased. It is preferred that the amount of the debt should also reflect the principal and interest amounts, but the reality is that the debt purchaser is effectively purchasing an account receivable of a specific amount, which renders as moot the principal and interest breakdown as well as any fee amounts that were added to the credit card account balance before it became simply an account receivable.
A Typical Delinquent Debt Credit File
In a typical delinquent credit card account information package that is transferred to the purchaser of a delinquent debt, you will find a credit report, or credit reports, that were obtained at the time the account originally was granted, and maybe a more current credit report obtained by the original lender, a subsequent owner of the debt, or the current debt owner.
In reviewing these credit reports, it is usually quite evident why the borrowers had to seek credit from a credit card issuer that specializes in extending credit to people with no credit history, little credit history, or a history of some credit problems. It is not unusual to see multiple delinquencies, collection accounts, charge-offs, public record accounts, tax liens, and other signs of credit distress.
Sometimes, a delinquent credit card account information package will contain a transaction history covering all or a portion of the period of time that the account was active. It is typical for these transaction histories to reflect the actual individual purchases as well as late charges, overlimit fees, and other fees associated with the account.
It is not unusual for high-risk credit card accounts to carry an interest rate in the range of 23% to 35% as well as other fees such as a late charge fee, an overlimit fee, an annual fee, and possible other fees. While these interest charges and fees are unquestionably higher than those available to more creditworthy borrowers, they are industry standard charges and are definitely more than fair and reasonable when you consider that the debt is seriously delinquent and probably was charged off by the lender. When debt has been charged off, no rate of interest can compensate the lender for the loss, especially when you consider that credit card debt is completely unsecured.
When credit card issuing companies that specialize in taking on these types of risks extend credit to people who have credit problems, the company is taking a much higher risk of non-payment (and late payment) than it would if it chose to extend credit to people who have no (or fewer) credit problems. As compensation for taking this additional risk, a company is justified in charging an interest rate and other charges and fees that are higher than those that would be obtainable by someone without an impaired credit history or with a favorable established credit history. Therefore, it is my professional opinion to a reasonable degree of professional certainty that interest in the range of 23% to 35% plus other charges and fees for high-risk credit card programs are fair and reasonable and conform to nationwide industry standard practices and procedures.
Interest and Fee Notices and Consumer Choices
It is standard practice in the credit card industry for interest rates, fees, and other charges to be prominently cited on credit card applications as well as on monthly bills so that a prospective customer can make a judgment as to how one credit card program compares to other available programs. Presumably, prospective credit card customers – whether they have good or bad credit – will voluntarily choose the credit card program that offers them the best terms and charges. This supports my opinion that the fees and charges on these high-risk credit card accounts are fair and reasonable.
How Credit Card Holders Signify Their Acceptance of the Terms of Their Account
It is common practice in the credit card industry for issuers to provide credit card account holders with an agreement explaining the terms of their credit card account, and the credit card holder’s usage of the credit card account acknowledges their acceptance of the terms and charges, and that those terms and charges represent the best deal available to them in the marketplace.
After a credit card customer makes their initial decision to enter into a particular credit card program, the credit card customer essentially ratifies their continuing acceptance of the terms of the credit card program on an ongoing basis each month by continuing the use of the credit card program and not refinancing their debt with another credit card program. If a credit card customer determines that another credit card program is more advantageous for them than their present credit card program, the customer always has the option of terminating their existing credit card program and replacing it with a different one. The fact that a credit card customer chooses each month to continue using their credit card account indicates their acceptance of the fact that their present credit card program represents a more advantageous deal for them than any other credit card programs available to them.
These points must be kept in mind when defending lawsuits involving delinquent credit card debts.
ABOUT THE AUTHOR: Don Coker
Expert witness and consulting services. Over 400 cases for plaintiffs & defendants nationwide, over 100 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ.
Clients have included numerous individuals, 60 banks, and governmental clients such as the IRS, FDIC.
Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental banking regulator.
B.A. degree from the University of Alabama. Completed postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School.
Called on by clients in 27 countries for work involving 56 countries. Widely published, often called on by the media.
Copyright Don Coker
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.