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UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C.
20580
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Division of Credit Practices
Bureau of Consumer Protection
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March 23, 1994
Sheldon Feldman, Esq.
Weil, Gotshal and Manges
1615 L Street N.W.
Washington, D.C. 20016
Dear Shelly:
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.
Sincerely,
John F. LeFevre
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