ACA International has asked the Massachusetts Attorney General to clarify whether third party debt collectors acting on behalf of original creditors are subject to the validation requirements set forth in 940 CMR 7.08.
Historically, third party collection agencies have operated in Massachusetts with the understanding that they are governed by regulations promulgated by the Division of Banks (209 CMR 18.00). Their clients (creditors) are not subject to rules of the Division of Banks, but are governed by the Attorney General regulations (940 CMR 7.00).
The current regulations were updated in 2012, and the definition of “creditor” was updated to include debt buyers. Specifically, 940 CMR 7.03 defines a creditor this way:
Creditor means any person and his or her agents, servants, employees, or attorneys engaged in collecting a debt owed or alleged to be owed to him or her by a debtor and shall also include a buyer of delinquent debt who hires a third party or an attorney to collect such debt provided, however, that a person shall not be deemed to be engaged in collecting a debt, for the purpose of 940 CMR 7.00, if his or her activities are solely for the purpose of serving legal process on another person in connection with the judicial enforcement of a debt.
When these changes were adopted, ACA International and its Northeast Chapter consulted with the Attorney General’s office and confirmed that the changes would not apply to third party debt collectors seeking to collect funds on behalf of the original creditors; they would only apply to debt buyers and the original creditors collecting their own accounts. In reliance on those assurances, the association informed its members that those who did not fall within the definition of a creditor or debt buyer (i.e. traditional third party agencies) were not subject to the regulations.
Under the FDCPA, a request for validation requires the agency to confirm that it is collecting the correct amount from the correct person. However, the statute is silent as to how that may be accomplished.
[V]erification of a debt involves nothing more than the debt collector confirming in writing that the amount being demanded is what the creditor is claiming is owed; the debt collector is not required to keep detailed files of the alleged debt. Chaudhry v. Gallerizzo, 174 F.3d 394 (4th Cir.1999).
The Massachusetts regulations (940 CMR 7.08) provide very specific and detailed requirements when validating a debt. These include, most significantly, providing copies of the documentation with the consumer’s signature and a ledger reflecting all payments, credits, balances and charges. While these requirements may seem reasonable on their face, this can create a substantial burden on an agency’s creditor clients, particularly in the case of small balance accounts or where the account has been in existence for many years. Often in these cases, the documentation required does not exist and does not fit this type of payment obligation. The regulations were aimed at large balance credit accounts such as mortgages and car loans where such documentation is routinely used and more easily accessible by the creditor or debt buyer; small balance accounts often do not have the same type of documents at the time the account is created. While the regulation allows for the possibility that the information might not exist, it still requires a diligent search and only after that is accomplished can the creditor continue collection.
The current issue
Creditors who do not believe that the regulations should apply may be reluctant or unwilling to provide the information required. Thus, agencies who request the information (particularly in light of the initial guidance provided when the definition was changed) may find themselves at a competitive disadvantage over agencies who are not asking their clients for this information.
The industry argues that traditional third party debt collectors are not agents in the legal sense of the word; they are independent contractors, and are not typically in a position to bind the principal through their actions. Consequently, the industry claims, the prior understanding as confirmed in 2012 is consistent with this definition.
In an effort to avoid further ambiguity and to assist its member agencies, ACA International has requested formal guidance on whether and to what extent the validation requirements in section 7.08 apply to third party debt collectors who are contractors and not lawful agents are required to comply with this rule.