Fair Debt Collections Laws Can Surprise You

The Fair Debt Collection Practices Act (FDCPA) was enacted to prevent abusive practices by bill collectors. The Federal FDCPA, as well as its state counterparts, may apply to landlords, investors, and note buyers.

The FDCPA applies to anyone who regularly collects or attempts to collect debts owed or due another. The definitions of “debt collector” and “debt” have been given broad meaning by state Fair Debt Collection Practices laws and court interpretations of the federal law.

Rents are “debts”

The FDCPA contains regulations that apply when a debt collector is collecting from a debtor on behalf of a creditor. In one federal court case, a New York City attorney for the landlord was held liable for violations of the FDCPA. In that case, the court ruled that an attorney was in violation of the FDCPA when trying to collect from a tenant in relation to an eviction proceeding.

Although the attorney was following state law eviction procedures, the court found that back rent was a “debt” within the meaning of the FDCPA. The FDCPA and the Romea case also apply to property managers, relatives, friends and any other person or company that the landlord uses to collect rent.

Even if you collect your own rents, you are not necessarily safe! The FDCPA is a federal law that sets forth the MINIMUM regulations. Keep in mind that many states (e.g., Texas) have enacted their own rules that are much more stringent than the federal statute. Many of these laws apply not only to deceptive acts of the collection agency, but to the landlord himself.

Some of the following activities may be a violation of state fair debt collection laws:

  • Eviction notices misstating the rent owed by the tenant or indicating unlawful action if the tenant does not pay

  • Demanding rent before it is due under the lease or state law

  • Changing locks or other forcible eviction

  • Confiscation of tenant’s personal property without proper state procedure

  • Improper withholding of security deposits

  • Abusive language and other threats

While some of these activities are illegal under other state laws, invoking the state unfair debt collection practices acts may entitle the tenant to treble damages and attorney’s fees.

Mortgages, notes, and liens are “debts”

Keep in mind that money owed on a promissory note, mortgage, land contract, judgment or other lien is also covered by the act. If you purchase one of these debts when it is in default with the intent of collecting it, you are a “debt collector” under the FDCPA and under most state laws.

Thus, if you buy a defaulted second mortgage for a discount and try to collect it from the borrower/homeowner, you must comply with the appropriate fair debt collection practices acts. In some states, you must be licensed as a debt collector in order to buy defaulted obligations with the intent of collecting them from the debtor.

Other real estate transactions

The federal courts, in interpreting the FDCPA, have suggested that a “debt” is more than just an extension of credit. For example, one court ruled that a Condominium Assessment was a debt covered by the FFCPA. Since many of these assessments, and monthly dues, are collected by a real estate management company, failure to comply with the FDCPA could result in civil liability.

Suppose that you sign a purchase contract to sell your real estate. Could the improper retention of an earnest money upon the buyer’s default be considered a violation of the FDCPA? Maybe not, but some state laws might cover such a transaction.

For example, the Colorado FDCPA defines a debt as any “obligation of a consumer arising out of any transaction in which money or property is the subject of the transaction.” If the buyer was purchasing the property as his personal residence (hence making him a “consumer”), the Act could arguably apply.

The Bottom Line

Whenever dealing in transactions involving debt or the collection of money, be familiar with the federal and state fair debt collection practices. If you are unsure, never communicate in writing to a debtor without having your attorney review the letter for compliance. Also, watch what you say on answering machines and over the phone. It is legal in most states for a debtor to tape-record the conversation!


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By CREOnline Contributor

A content contributor to the original CREOnline.com.