staff attorneys from two NACM affiliates teamed up to provide valuable
information about important laws that regulate the collections process.
D. Park Smith, Esq. of NACM Southwest and Scott Lee, Esq., CCE, of NACM
Business Credit Services, conducted a free teleconference to NACM
members on November 7.
attorneys, although not offering specific legal advice, did point out
important areas of the law of concern to collections managers. The
FDCPA (Federal Debt Collection Practices Act) is something with which
collections managers should be familiar. The text of the Act can be
found on the Internet at: http://www.ftc.gov/os/statutes/fdcpa/fdcpact.htm.
Smith pointed out that the FDCPA covers consumer obligations for
personal, family or household purposes. He defined third party debt
collectors as those who collect debts owed, or due, or asserted to be
owed to another. "It probably doesn’t apply to NACM members collecting
their own receivables," he noted. There are also a number of prohibited
behaviors under FDCPA such as the use or threat of violence, the use of
obscene or profane language, repeated ringing of a phone number, making
false representations of law enforcement or governmental agencies, etc.
Smith said that the law prohibits tactics that no reasonable debt
collector would employ.
In addition to
the FDCPA, Smith said that many states have formal debt collection
practices reflected in their state laws. There are differences among
these laws however. For example, he pointed out that California law
applies to third party debt collectors and original creditors. In
Florida, the law applies to consumer and commercial debt. "It’s very
important for each of you to be clear about what debt collection
practices apply to you in the states in which you’re collecting debts."
Smith advised consulting the appropriate local NACM affiliate to learn
about a state’s specific collection laws and regulations. Smith said, a
personal guarantee, for example, while it may be used in a commercial
debt situation, may also be governed by consumer debt collection
provisions of state laws
important to avoid tortuous interference during collections, which
Smith defined as a wrongful act or injury to a business or individual.
Such examples are defamatory comments or libelous written information
about a company or individual that could cause creditors to take an
adverse credit action against that company or person. "Never ever
repeat anything you wouldn’t want the subject customer to hear or
read," Smith said. "Be careful about what you put in your notes." He
strongly advised against ever putting hearsay or rumors about a debtor
into notes or communications. Lee recommended being careful about how
you talk about a customer at a credit group meeting. Standards apply to
what can be said about debtors at these meeting and violating them
could open up a group member or all members to legal action by the
offended debtor. "Don’t give any kind of difficult customer any claim
that your collection practices harmed them in any way," Smith added.
Lee said in order to avoid any problems involved in sales it is
important that any advertisements, circulars or other promotional items
mentioning products or services have correct information in them. "You
need to be accurate about your prices and terms." "When your customer
places the order, that is the offer and you have the right to accept or
reject that offer. You’re acceptance may be manifested by simply
shipping the product." Lee pointed out that credit applications are a
great place to state what the terms will be and how to handle any
exceptions to these terms. He said it is important to be explicit about
sale terms, because what you think in your mind are the terms may not
be the actual case. "The acceptance of terms is determined by your
outward manifestation and not your subject thought." Lee also
recommended getting the terms of a sale in writing in such documents as
the sales agreement and credit application. "The days when you can deal
on just a handshake are unfortunately past." Collections activities can
also be proactive in preventing any future payment problems Lee noted.
For example, he said that having the collections department follow up a
sale with calls to make sure everything is going well with your
customer might be beneficial. "There’s nothing that says collections
can’t be part of your customer service team."
Smith said that risk mitigation tools should be used properly. For
instance, when using a personal guarantee, it is imperative to
determine that the person has the ability to pay and is not judgment
proof. "You really have to do some asset evaluation work." When relying
on cross-corporate guarantees Smith said, "It’s important to ascertain
if the cross-corporate guarantor is solvent." On the use of letters of
credit, he advised making sure you, as the creditor, fully understand
the circumstances under which you get paid and what documents you must
present to the bank for payment. On assignments of assets or claims, he
noted that it is important to find out if that asset or claim is
assignable without the consent of the end user customer." And, on
secured transactions, Smith pointed out that they must be in compliance
with UCC (Uniform Commercial Code) Article 9. He also recommended
putting in a collateral description in the security agreement and
making sure it is filed in the proper state. On the subject of purchase
money security interests, Smith said a creditor’s interest is in the
products it sells and if it executed properly, other creditors can’t
get a claim on that interest. However, he added, "Your collateral
interest is extinguished if the product is used to make another
Both Smith and Lee strongly advised creditors to consult an NACM affiliate about questions they have relating to collections.