Can Credit Card Debt Collectors Continue to Charge Interest and Late Charges After Charging-Off the Debt?
A federal district court in Oklahoma recently dismissed a putative class action asserting that defendants’ credit card debt collection activities violated the Fair Debt Collection Practices Act (“FDCPA”). The case, Walkabout v. Midland Funding LLC, Case No. CIV-14-939-M (W.D. Okla. Mar. 22, 2016), after addressing a threshold statute of limitations question under the FDCPA, focused on two primary issues impacting debt collector’s activities following the original creditor’s charge-off of the account. First, the Court examined whether the plaintiffs pleaded sufficient facts to establish that the original creditor waived its right to charge interest and late charges after charging-off the debt. Second, the Court examined whether there could be an FDCPA violation where the debt collector exercised its right to charge the statutory rate of interest post charge-off. This decision could impact both debt collectors and creditors selling debts to debt collectors (as it could affect the marketability of charged off accounts).
Walkabout concerned a credit card account opened with HSBC Bank Nevada, N.A. (“HSBC”) in 2007, and which was later charged off by HSBC in 2010 with a balance of $2,311. After the debt was acquired by Midland Funding LLC and Midland Credit Management, Inc. (“Midland”), Midland began adding interest to the debt despite the fact that HSBC, according to plaintiff’s allegations, had ceased furnishing monthly statements and stopped adding interest and other charges after the account was charged off.
Plaintiff argued that HSBC had waived its right to charge interest post charge-off, and that Midland’s practice of adding interest after it acquired the account, and reporting the new increased balances to credit reporting agencies, violated the FDCPA. Midland relied on two recent cases dismissing FDCPA claims to argue that the mere fact that an original creditor ceased to send statements or charge interest post charge-off is insufficient to infer waiver by the original creditor. Bunce v. Portfolio Recovery Assocs., 2014 WL 5849252 (D. Kan. Nov. 12, 2014; Willingham v. Midland Funding, LLC, Case No. CIV-13-748-D (W.D. Okla. July 6, 2015). The court disagreed, relying on Terech v. First Resolution Mgmt. Corp., 854 F.Supp.2d 537 (N.D. Ill. 2012), to point to additional allegations in plaintiff’s case beyond those alleged in Bunce and Willingham, which the court held were enough to survive a motion to dismiss. For example, the plaintiff alleged that HSBC ceased adding interest and sending statements “for valid business reasons,” including incurring additional expenses and avoiding an increase in bad debt on its books. Plaintiff also alleged that HSBC was following its policies in not sending out statements. These allegations were sufficient to survive dismissal.
Midland also argued, even if HSBC had waived its right to charge interest under the credit card agreement, Midland was still authorized under Oklahoma law to charge interest, based on Oklahoma usury statute, which provides a legal rate of interest of 6% in the absence of any contract rate of interest. Plaintiff countered that HSBC effectively set the contracted rate of interest at zero when it waived its right to charge interest (meaning Midland, as an assignee of HSBC, had no right to collect interest at a rate in excess of 0%). The court sided with Midland, finding plaintiff had not pled sufficient facts that, by waiving its right to charge interest, HSBC actually changed or set the contractual rate of interest to zero and therefore defendants had a statutory right to charge interest.
The court’s ruling follows a number of other courts that have held that debt collectors are entitled to charge state statutory pre-judgment interest on a debt after it was charged off by the original creditor. See, e.g., Peters v. Financial Recovery Serv., Inc., 46 F. Supp. 3d 915 (W.D. Miss. 2014). This is also arguably consistent with guidance from the Consumer Financial Protection Bureau (“CFPB”), which states that “[a] debt collector may not collect any interest or fee not authorized by the agreement or by law” (emphasis added) but that “[s]ome state laws . . . allow interest to be charged and costs to be added”. However, other courts have found the opposite and ruled that where an original creditor charges off a debt and waives its right to collect contractual interest before selling the debt to a debt collector, the debt collector has no right under state law to collect statutory interest on the debt and attempting to do so would violate the FDCPA. See, e.g., Stratton v. Portfolio Recovery Assocs., LLC, 770 F.3d 443 (6th Cir. 2014). Walkabout did not address the issue of disclosure of interest accrual, and there is still conflicting case law on this topic, with some courts finding debt collectors must disclose interest accrual in communications stating higher balances and others finding debt collectors are not required to specifically disclose interest accrual as long as communications correctly state the balance due.
Debt collectors wishing to charge interest on accounts that were charged off prior to being acquired (and creditors that regularly sell charged off debts) should familiarize themselves with controlling case law in their jurisdiction (if any) and continue to follow developing case law addressing if and when post-charge-off interest can be charged in a manner consistent with the FDCPA.