Eleventh Circuit Considers Permissibility under FDCPA of Percentage-Based Debt Collection Fees

by Ballard Spahr LLP

In a per curiam decision last week, the U.S. Court of Appeals for the Eleventh Circuit suggested that percentage-based debt collection fees are permissible under the Fair Debt Collection Practices Act (FDCPA) if they are supported by the language of the consumer agreement underlying the debt at issue. The decision underscores the need for debt collectors and debt buyers to review such agreements carefully to determine whether the collection fees they seek to charge are consistent with the agreements’ terms.

In Bradley v. Franklin Collection Service, Inc., a debt collection agency sought to collect a medical bill that included a collection fee equal to 33 1/3 percent of the account balance. In his putative class action complaint, the consumer alleged that the fee violated the FDCPA provision prohibiting the collection of any amounts that are not “expressly authorized by the agreement creating the debt or permitted by law.” The fee had been added to the consumer’s account by the medical provider in accordance with its agreement with the collection agency.

The Eleventh Circuit, reversing the district court, held that the fee violated the FDCPA because “there was no express agreement between [the provider and the consumer] allowing for collection of the 33-and-1/3% fee.” In the patient agreement, the consumer had only agreed to pay the medical provider’s “costs of collection,” and no evidence was presented that the collection fee charged bore “any correlation to the actual cost of [the agency’s] collection effort.” (emphasis supplied). (The Eleventh Circuit followed the Eighth Circuit’s 2000 ruling in Kojetin v. CU Recovery, Inc., which also found that a percentage-based collection fee violated the FDCPA because the consumer had only agreed to pay actual collection costs.)

Most significantly, the Eleventh Circuit observed that its holding “is not to say that [the consumer and the medical provider] could not have formed an agreement allowing for the collection of the percentage-based fee. It is the nature of the agreement between [the consumer and the medical provider], not simply the amount of the fee that is important here.” The court contrasted the consumer’s patient agreement with that of another named plaintiff who had agreed to pay “all costs of collection including…reasonable collection agency fees.”

The court also observed that based on such language, the other named plaintiff had declined to argue on appeal that his patient agreement did not cover the 30 percent collection fee he was charged. In addition, it noted that “[c]ourts examining other contractual language have also suggested that a percentage-based fee can be appropriate if the contracting parties agreed to it.”

The decision clearly implies that even if unrelated to actual collection costs, a percentage-based collection fee will not violate the FDCPA if it is supported by the language of the underlying consumer agreement. Accordingly, debt collectors and debt buyers seeking to charge percentage-based collection fees should make sure that such agreements contain contractual language allowing such fees and any other fees sought to be charged.

In addition, debt collectors and debt buyers seeking to charge percentage-based collection fees should confirm that such fees are permissible under applicable state law. Many states do not allow such fees, and even if the fees are supported by the contractual language, a debt collector or debt buyer would violate the FDCPA and state law by seeking to charge percentage-based fees in such states.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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