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Creditors like the first-party model because it maximizes control over the collection agency. Debt collectors like the first-party model because it insulates them from liability under the Fair Debt Collection Practices Act (FDCPA). Arguably, consumers like the first-party model because they effectively communicate directly with the party to which they owe money. But if this seems too good to be true, it probably is.

Three cases recently shined a spotlight on the first- and third-party collection models that should give the first-party servicer pause. Any agency offering first- and third-party collection services is well advised to review the terms of their contractual relationship with their creditor clients, consider each client’s definition of default, examine the chain of collection treatment, and then document the representations made to the consumer about the default status of the account before initiating any type of collection activity.


Referring an account to a third-party debt collection agency means the patient account is in default.

In Fausz v. NPAS, Inc., Civil Action No. 3:15-cv-00145-CRS-DW, United States District Court, W.D. Kentucky, Louisville, February 22, 2017 the Court decided that if the original creditor declares a debt to be in default and retains a third-party collection agency to collect the debt, then the collection agency is subject to the FDCPA. On the contrary, if the debt has not been declared in default prior to assignment to a collection agency, the agency is not restricted to collecting the debt subject to the FDCPA and may entertain collection using a first-party model.

At issue in this case was the definition of default and whether the account collected by NPAS, a first-party debt collector, was in default at the time of assignment. Basically, if the Court found the debt to be in default at the time it was assigned to the defendant for collection, the defendant collection agency would be subject to the Fair Debt Collection Practices Act (FDCPA) and prohibited from collecting the debt using a first-party collection model.

Statutory liability under the FDCPA is limited only to debt collectors. Wadlington v. Credit Acceptance Corp., 76 F.3d 103, 104 (6th Cir. 1996). The statute defines “debt collector” as: any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

15 U.S.C. § 1692a (6). A debt collector does not, however, regulate the conduct of a person who attempts to collect a debt that is not in default. Id. § 1692a(6)(F)(iii). Congress did not specify the meaning of when an account is “in default” when it enacted the FDCPA.

In this class action, plaintiff’s account was assigned to a series of third-party collection agencies for collection before finally being assigned to NPAS for collection using a first-party model. The hospital argued it never declared the debt to be in default and had a policy of not doing so and the defendant should not be obligated to service the debt subject to the FDCPA. Notwithstanding this argument, the Court considered the hospital’s practice of sending the account to a series of third-party debt collectors before sending it to the first-party servicer – the legal equivalent of declaring the account to be in default.


Third-party collection activity followed by first-party collection activity does not fly.

In Pollak v. Firstsource Advantage, LLC (Case No. 15-6046, U.S. District Court for the District of New Jersey, March 16, 2017), the Court denied the defendant’s motion to dismiss the amended complaint.  In this class action, plaintiff argued notwithstanding the defendant’s assertion it was, at all times, acting as a third-party debt collection agency, the defendant was in fact nothing more than a third-party debt collector masquerading in first-party collector’s clothing. A copy of the court’s opinion can be found here. insideARM previously wrote about this case on April 4, 2017.

Plaintiff was a New Jersey resident who opened an American Express credit card account and later defaulted on the payments. American Express hired Firstsource to collect the debt. Initially Firstsource sent the consumer the validation notice on Firstsource’s letterhead and requested payment be made to Firstsource directly just like any other third-party collection agency. But later, on two occasions, Firstsource sent the consumer settlement offers on American Express letterhead, requesting payment in settlement be made directly to American Express by way of Firstsource’s address. The phone number on those settlement letters was answered as  “American Express.”

Plaintiff claimed Firstsource the FDCPA under the following:

  • Section 1692e (making any “false, deceptive, or misleading representation”); Section 1692e (9) (“use or distribution of any written communication . . . which creates a false impression as to its source, authorization, or approval”);
  • Section 1692e (10) (“use of any false representation or deceptive means to collect or attempt to collect any debt”); and
  • Section 1692e (14) (“use of any business, company, or organization name other than the true name of the debt collector’s business, company, or organization”)

Additionally, Plaintiff alleged the Settlement Offer Letters sent by Firstsource on American Express letterhead violated 15 U.S.C. § 1692e (11) by failing to disclose that each communication was an attempt to collect a debt by a debt collector and that any information would be used for that purpose.

Just to be clear, this case did not provide a definitive decision on the allegations; the court merely denied the Defendant’s motion to dismiss the case. This issues presented are still being litigated.  The rules for deciding whether to dismiss a case are not the same rules for any ultimate decision. In a motion to dismiss, the court accepts all of plaintiff’s allegations are true. That will not be the case when the court or jury ultimately decides the case.


If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.

In Andrews v. Simm Associates, Inc., Case No. C16-5770 BHS United States District Court, W.D. Washington at Tacoma, August 9, 2017, the Court granted in part and denied in part the defendant’s motion for summary judgment and granted plaintiff’s motion for leave to amend. In this case the question of whether the defendant was a debt collector under the FDCPA turned on whether defendant could provide the court with substantive evidence it was an employee of the creditor.

The most the Court could decipher regarding the defendant’s relationship with the creditor, Applied Bank, was that the defendant was contracted to perform collection services on Plaintiff’s delinquent account. The only proof offered by the defendant that it was not a third-party debt collector was its statement that it “was acting as a first party collection service and collecting in the name of the creditor.”  The Court found this evidence to be insufficient to establish that the defendant was a defacto employee of the creditor and refused to find that defendant was not a debt collector subject to the FDCPA.”

Consumer attorneys see smoke in the first-party model and where there is smoke there is fire. Make sure you fireproof your collection model with a solid understanding of the requirements for both first- and third-party debt collection service model.


Disclaimer: Ontario Systems is a technology company and provides this blog article solely for general informational and marketing purposes. You should not rely on the content of this material for any other purpose or as specific guidance for your company. Ontario Systems’ advice, services, tools and products described herein do not guarantee compliance with any law or industry standard. You are ultimately responsible for your own company’s actions and compliance efforts. Because everyone’s situation is different, you must consult your own attorneys, accountants, and/or other advisors to obtain specific advice on your company’s compliance, legal, tax, regulatory and/or other business needs. Despite Ontario Systems’ efforts to provide current and up-to-date information, you need to recognize that the information contained herein may become outdated quickly and may contain errors and/or other inaccuracies.

© 2017 Ontario Systems, LLC. All rights reserved. Information contained in this document is subject to change. Reproduction of this publication is not permitted without the express permission of Ontario Systems, LLC.

Posted by Rozanne Andersen

Rozanne Andersen serves as Ontario Systems’ Vice President and Chief Compliance Officer. She is a licensed attorney and 30+ year veteran and advocate of the banking, credit, and collection industries. She presently leads Ontario Systems’ compliance software design initiatives, directs the company’s corporate CFPB compliance efforts, functions as a thought leader for the industry, and leads the company’s product development initiatives to support compliance with consumer financial laws and regulations. In 2020, Rozanne received an international Compliance Officer of the Year award from Women in Compliance. As former general counsel, director of government affairs, and CEO of ACA, Rozanne is thrilled to combine her legal and government affairs work with her new legal specialty, compliance technology innovation. Rozanne can be reached at
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