UNITED STATES OF AMERICA
March 23, 1994
Sheldon Feldman, Esq.
David Medine has asked me to respond to your letter of February 24 concerning the circumstances under which a debt collection agency must disclose its affiliation with a creditor that owns a controlling interest in its stock when the agency is involved in debt collection activities.
You state that 55-75% of this agency's debt collection business will be obtained from parties other than the creditor-owner. The agency will have its own employees, deal at arms length with the creditor and have control over the collection process. You ask whether the agency is required by Section 807(14) of the Fair Debt Collection Practices Act to disclose its affiliation with the creditor when engaged in the collection of debts. You cite portions of the Staff Commentary on the Act which would indicate that such a disclosure need not be made under these circumstances.
Generally, we stand behind the Commentary with the following caveat. The key concept is de facto "independence." As you know, when a debt collection agency uses a business name on dunning letter stationery without disclosing any affiliations, it implies strongly that the agency exists on its own and is either totally independent of any other entities or is operating independently of those entities. Most agencies regard the "third party psychology" that results as advantageous in collecting debts because alleged debtors tend to pay more attention to a demand for payment if it is made by a party other than the creditor, i.e., a party whom the creditor has taken the trouble to hire to collect the debt at issue. To the extent that the agency is not operating independently of the creditor, however, using a business name without disclosing the business's affiliation with the creditor may be deceptive and violate the Act.
It appears from your letter that the collection agency to be purchased by your client, although owned by the creditor, will be operating independently of the creditor and, thus, can pass the independence test. Of course, the fact that over 50% of its business will originate with parties other than the creditor-owner is credible evidence that the agency will be controlling its own operations. In this connection, there is no magic percentage; it seems obvious that the greater the percentage of business that comes from outside sources, the stronger the presumption of independence becomes. Questions might arise at less than 50%, however, and the presumption would probably shift at 30-40%. This, of course, depends on the facts of each individual case.
I hope this has been helpful.
John F. LeFevre