Eleventh Circuit Holds Collection Fee Based On Percentage Of Principal Owed In Violation Of Contract Terms Violated FDPCA

FDCPA Debt Collection

On January 2, the U.S. Court of Appeals for the Eleventh Circuit held that a debt collector violated the FDCPA by collecting a fee based on a percentage of the principal owed when the contract allowed a fee only for the actual cost of collection. Bradley v. Franklin Collection Serv., Inc. No. 10-1537, 2014 WL 23738 (11th Cir. Jan. 2, 2014). The debtor filed suit claiming, among other things, that the collector violated FDCPA Section 1692f, which prohibits unfair or unconscionable means of collection, including “collection of any amount . . . unless such amount is expressly authorized by the agreement creating the debt or permitted by law,” when it charged a fee that was not the actual cost of collection but rather liquidated damages. The court found that the contract only obligated the debtor to pay “all costs of collection,” i.e. the actual costs of collection and not a percentage-based fee where that fee did not correlate to the costs of collection. The court explained that the collector failed to prove that the percentage-based collection fee—which the collector assessed before attempting to collect the balance due—correlates to the actual cost of its collection effort. Addressing the issue for the first time, the Eleventh Circuit held that because the fee breached the agreement that obligated the debtor to pay only the “costs of collection”, the fee violated FDCPA Section 1692f. The court did not hold that the FDPCA prohibits the use of percentage-based collection fees, provided the contracting parties agree to such an arrangement.