Regulation and Licensing of Collection Agencies

Collection agencies are closely regulated by the state[i].  Regulations that control collection agencies differ from state to state.  Any methods of collection that are different from those provided for in the statutes are regarded as prohibited[ii].  Similarly, an ordinance prohibiting any person engaged in the business of making collections to transact any part of such business on the streets of a city is considered unconstitutional.

Sometimes, a dispute may arise regarding the inclusion of a particular person or organization into the purview of statutes or ordinances that regulate the collection of agencies.  A creditor is not excluded from the provisions of a statute regulating debt collection practices only because the debt is owed to the creditor[iii].

Attorneys and small firms that collect debts incidentally will come under the purview of debt collectors.  They are not subject to a statute that regulates debt collection in a state.  However, attorneys who regularly engage in debt collection activities on behalf of their clients are subjected to the authorized statute[iv].

Complying with the bond condition imposed by statute, a person or firm can entrust a collection agency to receive payment for others or engage in the business of soliciting the right to collect any account.  In other words, a collection agency is required to provide a bond to guarantee its faithful accounting for the collected money[v].

However, some statutes prohibit an association or corporation from appointing a collection agency in collecting or receiving payments for compensation[vi].  It is to be noted that any failure to comply with the applicable licensing and regulatory requirements can result in the revocation of a license to operate a collection agency.

Absent discrimination against out of state competition or imposing undue burden, a state can pass regulatory laws to protect its residents from fraud and unconscionable conduct by out of state collection agencies that maintain representatives within the borders of the state[vii].  If a statute has no express prohibition against solicitation by a collection agency, then the solicitation of assignments of claims for collection is valid[viii].  However, in some jurisdictions, collection agencies are prohibited by statute from soliciting or purchasing claims for the purpose of bringing actions.

Some practices by the collection agencies that amount to practice of law include:

  • Threatening debtors with legal proceedings;
  • Preparation of wills, contracts, and other legal instruments as a business or profession;
  • Provide legal advice or the employment of an attorney to give legal advice to the agency’s clients;
  • Preparation of legal papers and the general management of lawsuits
  • Splitting of legal fees with attorneys.

A state court can prohibit a collection agency from the unlawful practice of law while dealing with collections in bankruptcy cases.  Such regulations by the state courts in no way will interfere with the powers of the federal courts over bankruptcy actions.

Whereas, under federal law, it is regarded a crime if anyone engaged in the business of collecting private debts uses as part of the firm’s name the words “national,” “federal,” “United States,” or the initials “U.S.,” or any emblem or name, for conveying false impression that such business is a department or agency of the U.S.[ix].   Similarly, consumers subjected to abusive, deceptive, and unfair debt collection practices by third party debt collectors can sue for damages and other relief under the Fair Debt Collection Practices Act.  A debt collector is not insulated from liability under the Fair Debt Collection Practices Act only because the debtor also happens to be an attorney[x]. 

[i] State ex rel. Frieson v. Isner, 168 W. Va. 758 (W. Va. 1981)

[ii] Berry v. Ft. Worth, 132 Tex. 599 (Tex. 1939)

[iii] Monroe v. Frank, 936 S.W.2d 654, 659 (Tex. App. Dallas 1996)

[iv] Fouche’ v. Shapiro & Massey L.L.P., 575 F. Supp. 2d 776 (S.D. Miss. 2008)

[v] Wash. State Bar Ass’n v. Merchants’ Rating & Adjusting Co., 183 Wash. 611 (Wash. 1935)

[vi] Hankins v. Spaulding, 78 Idaho 533 (Idaho 1957)

[vii] California v. Thompson, 313 U.S. 109 (U.S. 1941)

[viii] Wash. State Bar Ass’n v. Merchants’ Rating & Adjusting Co., 183 Wash. 611 (Wash. 1935)

[ix] 18 USCS § 712

[x] Guerrero v. RJM Acquisitions LLC, 499 F.3d 926 (9th Cir. Haw. 2007)


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