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Debt Collection
You Be the Judge: Brown v. Card Service Center1
Facts: Card Service Center (CSC) sent Elizabeth Brown a collection letter demanding payment for a
delinquent credit card balance of $1,874. The letter said:
“You are requested to contact the Recovery Unit of the Card Service Center…to discuss your
account. Refusal to cooperate could result in a legal suit being filed for collection of the account.
You now have five (5) days to make arrangements for payment of this account. Failure on your part
to cooperate could result in our forwarding this account to our attorney with directions to continue
collection efforts.”
Brown did not contact CSC within five days and CSC did nothing other than send her more collection
letters.
Brown filed suit, alleging that CSC had violated the FDCO. She alleged that the letter was
deceptive because the company never had any intention of carrying out its threats. The district court
granted CSC’s motion to dismiss, and Brown appealed.
You be the Judge: Did CSC’s letter violate the FDCPA?
Holding: Yes, the district court’s ruling is reversed. According to the FDCPA, a debt collector may not
use any false, deceptive, or misleading representation or means in connection with the collection of any
debt. This includes the threat to take any action that cannot legally be taken or that is not intended to
be taken. Because CSC qualifies as a "debt collector" under the Act, to the extent the CSC Letter is
"false, deceptive, or misleading" or constitutes a threat to take any action not intended to be taken, it
violates the Act.
Because the FDCPA is designed to protect consumers, in considering claims under the FDCPA,
communications from lenders to debtors should be analyzed from the perspective of the "least
sophisticated debtor.” According to the court, the basic purpose of the least sophisticated consumer
standard is to ensure that the FDCPA protects all consumers, the gullible as well as the shrewd. Using
this standard, the court concluded that such debtor might be given the impression that litigation or
referral to a lawyer would be imminent if he or she did not respond within five days even though CSC
had no intention of taking that action, or has never or very rarely taken that action before. A debt
collection letter is deceptive where it can be reasonably read to have two or more different meanings,
one of which is inaccurate.
Question: Did Elizabeth Brown do anything wrong?
Question: Then why did she win this case?
Question: What did CEU do wrong?
Answer: The notice it sent Brown threatened legal action if she did not respond to the notice
Question: The letter sent to Brown from CSC stated that Brown’s failure to respond “could” result
in legal action. Doesn’t that mean that it may not result in legal action?
Question: It could mean that, but that ambiguity is what makes the notice illegal. According to the
court, if the language could have two possible interpretations, one of which is inaccurate, then the
statement is deceptive and a violation of the FDCPA.
General Question: In the scheme of things, who behaved worse – Brown or CSC?
1 464 F.3d 450, 2006 App. LEXIS 24579, United States Court of Appeals for the Third Circuit, 2006.
Three FDCPA Examples
1. Loretta Broadway of Meriden, Connecticut, owed $373 to a catalog company. She received a letter
that threatened to have her car and bank account seized if she did not pay what she owed. The
letterhead looked like this:
Goldman & Levine
Question: What conclusion would you draw from this letterhead?
Question: In fact, the letter was from G&L Financial Services, d/b/a as Goldman & Levine. What
conclusion would you draw from that information?
Answer: That G&L was violating the FDCPA, which prohibits a collection agency from using a
fake name when communicating with a debtor. The court ordered G&L to pay Loretta Broadway
2. As a standard part of its debt collection process, Allied Bond and Collection Agency in Trevose,
Pennsylvania told consumers it “might recommend” that the creditor file a complaint against them.
Question: Did Allied Bond's statement violate the FDCPA?
3. A collection agency was trying to collect $200 that Patty Herndon of Temperance, Michigan, owed
to a medical clinic. When the collection agency could not reach her, it called her mother, a 66 -year-old
widow, and said, “If you see her, give her the message that we're after her.”
Question: Is this agency in violation of the FDCPA?
Answer: Yes, the FDCPA prohibits an agency from contacting acquaintances of the debtor for any
Equal Credit Opportunity Act (ECOA)
The Equal Credit Opportunity Act (ECOA) prohibits any creditor from discriminating against a
borrower because of race, color, religion, national origin, sex, marital status, age (as long as the
borrower is old enough to enter into a legal contract), or because the borrower is receiving welfare.
Case: Treadway v. Gateway Chevrolet Oldsmobile Inc.3
Facts: Gateway Chevrolet Oldsmobile (GCO), a car dealership, sent an unsolicited letter to Tonja
Treadway notifying her that she was "pre-approved" for the financing to purchase a car. In fact,
Treadway had recently filed for bankruptcy and was not eligible for credit, a fact GCO knew. GCO
promised to apply for a loan on Treadway’s behalf, but never did. Instead it told her she had to have a
co-signer. Her godmother, Pearlie Smith, agreed to cosign. When GCO presented Smith with the
papers, she did not read them, so she did not realize that she was in fact agreeing to purchase and pay
for the car herself. After Treadway made the first payment on behalf of Smith, both women refused to
pay more – Smith because she did not want a new car; Treadway because the car was not hers. The
financing company repossessed the car but continued to demand payment.
GCO was running a scam. It would lure desperate prospects off the bankruptcy rolls and into the
showroom with promises of financing for a used car, and then sell a new car to their “co-signer” (who
2 These three examples were reported in Sana Siwolop, “Nasty Calls at 6 A.M.: Dunners Who Go Too Far,” New
York Times, July 14, 1996, p. F8.
3 362 F.3d 971; 2004 U.S. App. LEXIS 6325 Court of Appeals for the Seventh Circuit, 2004.
was, in fact, the sole signer). Instead of selling a used car to Tonja Treadway, GCO sold a new car to
Pearlie Smith.
Treadway sued GCO, alleging that it had violated the ECOA by not notifying her that it had taken
an adverse action against her. The district court granted GCO’s motion for summary judgment on the
grounds that GCO had not committed an adverse action under the ECOA. This appeal followed.
Issue: Did Gateway violate the ECOA?
Holding: Judgment for GCO reversed. The term, "adverse action" includes "a denial or revocation of
credit.” By deciding not to send Treadway's application to any lender, GCO effectively denied her
credit. Since GCO did not tell Treadway of its decision not even to apply for a loan on her behalf, it
would be difficult for her ever to determine that she was the victim of discrimination. Car dealers could
throw the credit report of every minority applicant in the "circular file" and none would be the wiser.
Question: Did Treadway ever file a loan application?
Question: Then how could she claim that she had been denied credit?
Question: Did the court rule that GCO had discriminated?
Answer: No, but it ruled that failing to tell her the truth was an “adverse action.” The statute
Consumer Leasing Act
The Consumer Leasing Act (CLA) requires a lessor to make several disclosures before a lease is
signed. However, the CLA does not apply to any lease for more than $50,000 or to the rental of real
property—that is, to house or apartment leases.
Magnuson-Moss Warranty Act
When Senator Frank E. Moss sponsored the Magnuson-Moss Warranty Act, this is how he explained
the need for such a statute:
[W]arranties have for many years confused, misled, and frequently angered American consumers….
Consumer anger is expected when purchasers of consumer products discover that their warranty
may cover a 25-cent part but not the $100 labor charge or that there is full coverage on a piano so
long as it is shipped at the purchaser’s expense to the factory…. There is a growing need to generate
consumer understanding by clearly and conspicuously disclosing the terms and conditions of the
warranty and by telling the consumer what to do if his guaranteed product becomes defective or
malfunctions.
The Magnuson-Moss Warranty Act does not require manufacturers or sellers to provide a warranty on
their products. The Act does require any supplier that offers a written warranty on a consumer product
that costs more than $15 to disclose the terms of the warranty in simple, understandable language
before the sale.
Additional Case: Muchisky v. Frederic Roo"ng4
Thomas Muchisky hired Frederic Roofing Company to re-roof his home. Their contract included a
12-year warranty guaranteeing the roof would be free from defects in workmanship and materials. The
roofing job was unsatisfactory, and Muchisky sued for damages. If the Magnuson-Moss Warranty Act
applied, then Muchisky was entitled to legal fees as well as damages.
Issues: Does the Magnuson-Moss Warranty Act apply in this case? Is the re-roofing of a home a
“consumer product” under the Act?
4 838 S.W.2d 74, 1992 Mo. App. LEXIS 1287 Missouri Court of Appeals, 1992.
Holding: The Act does not apply to purchases and sales of real estate, but it does apply to consumer
products that become affixed to property, such as air conditioners and hot water heaters. The court
concluded that the roofing was a consumer product and awarded attorney's fees to Muchisky.
Question: Does the Magnuson-Moss Warranty Act apply to all warranties?
Question: Is a house a consumer product?
Question: What about a product attached to a house, such as an air conditioner or hot water
heater?
Question: Is a new roof real estate or a consumer product?
Question: So where do you draw the line? What about new windows? Or a new carpet?
Ethics
Question: What obligations does a salesperson have to consumers? Why not simply adopt the rule,
“Buyer Beware?”
Answers:
In many of the cases discussed in this chapter, there is inequality of bargaining power, strength,
and determination. Certainly, the victims of the Arthur Murray studio could have refused to
General Question: Are other federal statutes needed to protect consumers?
Consumer Product Safety
The goal of the Consumer Product Safety Act of 1972 (CPSA) is to prevent injuries from consumer
products such as toys. This act created the Consumer Product Safety Commission (CPSC) to evaluate
consumer products and develop safety standards. Manufacturers must report all potentially hazardous
product defects within 24 hours of discovery.
Multiple Choice Questions
1. Dell advertised that a computer came with particular software. In fact, the software was not
available for several months. Instead, Dell sent customers a coupon for the software “when
available.” What did Dell do wrong?
I. Failed to offer buyers the opportunity to cancel their orders
II. Did not automatically cancel the orders
III. Did not ship the software within 30 days
(a) I and II
(b) I, II and III
(c) I and III
(d) II and III
2.
When customers called the number provided, New Rapids Carpet Center, Inc. sent salespeople to
visit them at home to sell them carpet that was not as advertised—it was not continuous filament
nylon pile broadloom, and the price was not $77. What set of rules has New Rapids violated?
(a) Unordered Merchandise
(b) Consumer Product Safety
(c) Truth in Lending
(d) Bait-and-Switch
(e) Fair Credit Reporting Act
3. Which of the following laws set limits on interest rates?
(a) State usury laws
(b) TILA and state usury laws
(c) TILA
(d) None, there are no limits on interest rates.
4. Companies must obtain permission from a consumer before charging for overdrafts on:
(a) debit cards
(b) credit cards
(c) neither
(d) both
5. You notice a charge on your credit card bill of $149.99 for a kayak. This seems very strange to
you because you have not purchased a kayak. What do you need to do to avoid having to pay
this charge?
(a) Call the store.
(b) Call the credit card company.
(c) Write the store.
(d) Write the credit card company.
Essay Questions
1. You Be the Judge: WRITING PROBLEM Process cheese food slices must
contain at least 51 percent natural cheese. Imitation cheese slices, by contrast, contain little or
no natural cheese and consist primarily of water, vegetable oil, flavoring, and fortifying agents.
Kraft, Inc. makes Kraft Singles, which are individually wrapped process cheese food slices.
When Kraft began losing market share to imitation slices that were advertised as both less
expensive and equally nutritious as Singles, Kraft responded with a series of advertisements
informing consumers that Kraft Singles cost more than imitation slices because they are made
from five ounces of milk. Kraft does use five ounces of milk in making each Kraft Single, but
30 percent of the calcium contained in the milk is lost during processing. Imitation slices
contain the same amount of calcium as Kraft Singles. Are the Kraft advertisements deceptive?
Argument for Kraft: This statement is completely true—Kraft does use five ounces of milk in
each Kraft Single. The FTC is assuming that the only value of milk is the calcium. In fact,
people might prefer having milk rather than vegetable oil, regardless of the calcium. Argument
for the FTC: It is deceptive to advertise more milk if the calcium is the same after all the
processing.
2. Josephine was a 60-year-old widow who suffered from high blood pressure and epilepsy. A bill
collector from Collections Accounts Terminal, Inc. called her and demanded that she pay $56
she owed to Cabrini Hospital. She told him that Medicare was supposed to pay the bill. Shortly
thereafter, Josephine received a letter from Collections that stated:
You have shown that you are unwilling to work out a friendly settlement with us to
clear the above debt. Our field investigator has now been instructed to make an
investigation in your neighborhood and to personally call on your employer. The
immediate payment of the full amount, or a personal visit to this office, will spare you
this embarrassment.
Has Collections violated the law?
Answer: The court held that Collections' letter violated the Fair Debt Collection Practices Act.
3. Thomas worked at a Sherwin-Williams paint store that James managed. Thomas and James had
a falling out when, according to Thomas, “a relationship began to bloom between Thomas and
one of the young female employees, the one James was obsessed with.” After Thomas quit,
James claimed that Thomas owed the store $121. Sherwin-Williams reported this information
to the Chilton credit reporting agency. Thomas sent a letter to Chilton disputing the accuracy of
the Sherwin-Williams charges. Chilton contacted James who confirmed that Thomas still owed
the money. Chilton failed to note in Thomas’s file that a dispute was pending. Thereafter, two
of Thomas’s requests for credit cards were denied. Have James and Chilton violated the
FCRA?
Answer: Once Chilton received notice of the dispute, it was obligated to re-verify the accuracy
of the information. It was not enough simply to ask James, because Chilton knew that James
4. In October, Renie Guimond discovered that her credit report at TransUnion incorrectly stated
that she was married, used the name “Ruth Guimond,” and had a credit card from Saks Fifth
Avenue. After she reported the errors, TransUnion wrote her in November to say that it had
removed this information. However, in March, TransUnion again published the erroneous
information. The following October, TransUnion finally removed the incorrect information
from her file. Guimond was never denied credit because of these mistakes. Is TransUnion liable
for violating the FCRA?
Answer: Although Guimond was never denied credit, she had been deterred from even
5. Thomas Waldock purchased a used BMW 320i from Universal Motors, Inc. It was warranted
“to be free of defects in materials or workmanship for a period of three years or 36,000 miles,
whichever occurs first.” Within the warranty period, the car’s engine failed and upon
examination was found to be extensively damaged. Universal denied warranty coverage
because it concluded that Waldock damaged the engine by over-revving it. Waldock
vehemently disputed BMW’s contention. He claimed that, while being driven at a low speed,
the engine emitted a gear-crunching noise, ceased operation, and would not restart. Is
Universal in violation of the law?
Answer: It depends on whom you believe. If, as Universal alleged, the damage was caused by
6. ETHICS After TNT Motor Express hired Joseph Bruce Drury as a truck driver, it ordered a
background check from Robert Arden & Associates. TNT provided Drury’s Social Security
number and date of birth, but not his middle name. Arden discovered that a Joseph Thomas
Drury, who coincidentally had the same birth date as Joseph Bruce Drury, had served a prison
sentence for drunk driving. Not knowing that it had the wrong Drury, Arden reported this
information to TNT, which promptly fired Drury. When he asked why, the TNT executive
refused to tell him. Did TNT violate the law? Whether or not TNT was in violation, did its
executives behave ethically? Who would have been harmed or helped if TNT managers had
informed Drury of the Arden report?
Answer: The FCRA required TNT to ask Drury’s permission before requesting a consumer report.
Discussion Questions
1. Should employers use credit checks as part of the hiring process? On the one hand, each year
employers suffer losses of $55 million because of workplace violence while retailers lose $30
billion a year from employee theft. Those who commit fraud are often living above their means.
On the other hand, there is no evidence that workers with poor credit reports are more likely to
be violent, steal from their employers or quit their jobs. And refusing to hire someone with a
low credit score may simply be kicking him when he is down. What would you do if you were
an employer?
2. The fee on a debit card overdraft can be as high or higher than the amount drawn out. Instead
of overdrawing their accounts, consumers would be much better off not spending the money,
using a credit card or paying cash. Typically, the people most likely to sign up for overdraft
“protection” are those who can least afford it – they have maxed out their credit cards and used
up any home equity. Is it ethical for a bank to offer an overdraft plan?
3. Look at the section entitled “Credit Card Act of 2009.” All of these activities used to be legal.
Which ones were unethical?
4. Go to youtube.com and search for “free credit reports.” Watch advertisements for
freecreditreport.com. Although the characters repeat the word, “free” over and over, in fact
the reports are not free unless the consumer signs up for the paid credit monitoring service. At
the end of the ad, a voice quickly says, “Offer applies with enrollment in Triple Advantage.”
Are these ads deceptive under FTC rules? Are they ethical under your Life Principles?
5. Advertisements for Listerine mouthwash claimed that it was as effective as flossing in
preventing tooth plaque and gum disease. This statement was true, but only if the flossing was
done incorrectly. In fact, many consumers do floss incorrectly. However, if flossing is done
right, it is more effective against plaque and gum disease than Listerine. Is this advertisement
deceptive?
