Lenders Must Be Cautious When Collecting Debts by Telephone During the Covid 19 Crisis

04.20.20

The Department of Financial Institutions (“DFI”) is the State agency responsible for administering the Wisconsin Consumer Act (“WCA”). As Wisconsin dealers who finance sales of vehicles are well aware, the WCA sets strict rules regarding when a consumer loan is considered in default and establishes a series of steps lenders must follow to enforce the loan after default. The rules regulating defaults and enforcement apply to loans in the initial amount of $25,000 or less. However, the WCA also establishes rules all debt collectors must follow when collection debts for consumer transactions, even if the amount financed initially exceeds $25,000. The WCA specifies 13 prohibited practices the details of which are beyond the scope of this bulletin. However, broadly summarizing the law, the WCA prohibits debt collectors from making threats against debtors, from making false statements to debtors, and from abusive conduct in the attempt to collect debts, such as excessively contacting the debtor, using obscene language, or threatening to or in fact disclosing details about the debtor’s financial situation to third parties.

On April 13, 2020, DFI issued Emergency Guidance on Prohibited Debt Collection Practices warning creditors about the use of phone calls to try to collect debts during the current COVID-19 crisis. The WCA prohibits debt collectors from engaging in any ​“conduct which can reasonably be expected to threaten or harass the customer or a person related to the customer.” DFI warns that this prohibition is fluid, reaching different types of conduct at different times. Though the WCA does not define ​“harass”, dictionaries broadly define it ​‘as ​“to annoy continually” or ​“disturb persistently”’. DFI warns what constitutes harassment changes with the times and overall economic conditions. In the current COVID-19 crisis, creditors and debtors alike are faced with a new economic reality. As such, DFI warns conduct that was previously acceptable in debt collection will now constitute harassment, as millions of consumers are unemployed and forced to decide whether to pay on loans or buy food and medicine. DFI expressly warns that it is rational for consumers to choose essentials, such as food and medicine, over car payments, credit card payments and similar debts.

As many people simply cannot pay all of their debts, DFI warns that using phone calls to attempt to collect debts is far more likely to constitute illegal harassment in this uncertain times. DFI explains its warning by detailing that, in DFI’s view, such collection calls are a futile waste of time and resources, as a debt collector cannot reasonably expect to convince a debtor to pay a credit card, car payment or similar debt over buying groceries and medicine. As DFI views it, the very act of a creditor calling a debtor is likely to drive the debtor to ignore calls from unfamiliar numbers, some of which ​“may be critical.” 

Regardless whether one agrees with DFI’s reasoning, the message is clear – attempting to collect a debt through phone calls during this crisis runs a higher risk of violating the WCA. Debt collectors must not treat this crisis as business as usual. Of course, DFI admits not all calls are prohibited during the crisis. For example, calls requested by the debtor, calls where there is a history of cooperative calls, or even a good faith attempt to compromise a debt by phone may not constitute harassment. However, in light of the potentially severe consequences for violating the WCA, including punitive damage awards and a debtor’s right to recover damages for mental anguish and emotional distress, debt collectors should tread carefully. DFI reasonably reminds that any lawsuits for violating the WCA could be turned to a jury to decide whether the debt collector violated the WCA, and those jurors may well look very poorly upon a creditor who did not give this crisis the respect and sensitivity the jurors consider appropriate. The point is well taken that these juries will not be creditor friendly. 

DFI also attached a recent interpretive letter addressing a specific violation of the WCA through collection calls to further emphasize the limits of a creditor’s right to use the phones to collect a consumer debt. That guidance clarified a rule all debt collectors should follow: do not call third parties as a means to contact a debtor, EXCEPT for the very limited purposes allowed by the WCA. There an auto loan servicer attempted to contact the debtor after default. When the debtor failed to return the servicer’s initial calls, the creditor proceeded to make 23 calls to the debtor’s family and friends, asking each to have the debtor contact the creditor urgently. The creditor never disclosed specifics about the debt or that the debtor defaulted. DFI broadly warned all debt collectors: ​“don’t call a debtor’s friends and family to try to collect a debt” unless they are also liable on the loan. The only permissible reason to call these third parties is in the extraordinary circumstance where the debt collector believes the customer’s contact information has changed and there are no less-intrusive ways to obtain the updated information. Even then, the discussion with the third party must only be to secure updated contact information. 

Though no details were shared with family or friends, the very action of the creditor calling and urging these contacts to have the debtor call back was an indirect disclosure of the fact that the debtor defaulted. The creditor surely knew these third parties would ask the debtor about the debt, indirectly revealing his loan delinquency. This was, therefore, illegal. 

The warnings are clear. Do not contact third parties about a debtor. If you believe you need to do so to get current contact information for the debtor, review the statute allowing this carefully, document your conversation with the third party, or speak to an attorney for guidance. Further, during the COVID-19 crisis and until the economy moves back toward a normal footing, be cautious about collecting debts from consumers. Though the down time the crisis creates can provide opportunity to focus on collecting old debts, do so with care, especially if reaching out by phone. Be extra courteous in the communications and be sure your conversation focuses on resolving the debt in a manner a jury would view as reasonable. Do not threaten to sue or to report the defaults to credit agencies. Do document the content of the calls, whether by recording or by copious note taking. When in doubt, err on the side of not making the collection call or discuss the situation with counsel ahead of time.