Banking and Finance Law Daily Asserting that consumer owed compound interest violated FDCPA
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Tuesday, July 17, 2018

Asserting that consumer owed compound interest violated FDCPA

By Nicole D. Prysby, J.D.

A consumer did state a claim under the Fair Debt Collection Practices Act (FDCPA) when he alleged that a debt collection letter said that he owed compound interest, and that he had not agreed to compound interest as required under state law, held the U.S. Court of Appeals for the Eighth Circuit. Minnesota law does not allow the collection of compound interest unless specifically agreed to in the contract, and the consumer alleged that the amounts stated in the debt collection letter included compound interest, in violation of the Minnesota law (Coyne v. Midland Funding LLC, July 16, 2018, Arnold, M.).

Background. The consumer, a resident of Minnesota, received a debt collection letter from a law firm, regarding a credit card debt. The letter asserted that he owed an account balance of $17,230.29, consisting of a principal balance of $13,205.30 and interest of $3,871.39 at the rate of 6.00%, plus incurred costs of $153.60. The consumer filed a putative class action under the FDCPA against the debt’s owner and debt collector, alleging that they used a false, deceptive, or misleading representation or means and an unfair or unconscionable means in attempting to collect the debt. Under Minnesota law, interest may not be compounded unless the parties have so agreed. The consumer alleged that he had not agreed to interest on the contractual interest and therefore the debt collector and debt holder falsely represented the amount of the debt and impermissibly tried to collect interest that they could not charge.

The district court dismissed the consumer’s claim, finding that he failed to state an FDCPA claim because he did not allege a materially false statement in the collection letter. The consumer appealed.

FDCPA claim. The Eighth Circuit reversed, finding that the consumer had stated a claim under the FDCPA. He alleged that the debt’s principal balance included contractual interest and that compounded interest on interest was not authorized by the agreement creating the debt. It was undisputed that Minnesota law does not allow compound interest unless agreed upon under the contract. And the consumer alleged that the debt’s principal balance already contained contractual interest. The court found this allegation plausible, based on the amounts stated in the letter. Because a demand to pay an amount of debt that is unauthorized under state law is actionable as a false statement or unfair collection attempt, false representation of the amount of a debt that overstates what is owed under state law materially violates the FDCPA’s prohibition against the false representation of the amount of any debt. An overstatement of the debt also misleads the consumer about the amount owed under the agreement with the creditor. Therefore, the consumer had stated a claim under the FDCPA, §§ 1692e and 1692f.

The court rejected the law firm’s argument that there was no FDCPA violation because the agreement did authorize the total amount of interest stated in the debt collection letter. The court declined to calculate the interest under the credit-card terms that the law firm had attached to its motion to dismiss, because the consumer had contested the terms as unauthenticated. And, the court held, it would decline to decide whether a debt collector may try to collect compound interest (which state law does not allow) without materially violating the FDCPA so long as the total amount of interest sought does not exceed the maximum amount permitted under the debtor's contract.

The court also noted that it applied the unsophisticated debtor standard. Although the consumer was an attorney, he was not acting as a debtor’s counsel.

The case is No. 17-2826.

Attorneys: Anthony Patrick Chester (Hyde & Swigart) for David Coyne. Russell S. Ponessa (Hinshaw & Culbertson LLP) for Midland Funding LLC and Midland Credit Management, Inc. Derrick Neal Weber (Messerli & Kramer) for Messerli & Kramer P.A.

Companies: Midland Funding LLC; Midland Credit Management, Inc.; Messerli & Kramer P.A.

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