COLLECTION AGENCIES ‑- ENFORCEMENT OF "COLLECTION COSTS" PROVISIONS BY LICENSED COLLECTION AGENCIES
A licensed collection agency may not enforce a "collection costs" provision in a note or other contract assigned or otherwise transferred to it for collection unless expressly authorized by statute.
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August 20, 1975
Honorable Jack G. Nelson
Director, Department of Motor Vehicles
P.O. Box 649
Olympia, Washington 98504 Cite as: AGLO 1975 No. 74
By letter previously acknowledged you have requested our opinion with regard to the legal ability of a collection agency to ". . . collect or attempt to collect. . . collection costs. . ." under certain described circumstances. Those circumstances are as follows:
(1) "A credit union obtained a promissory note in support of a loan to an individual and such promissory note contained the provision that in the event of default in payment the credit union was entitled to recover reasonable collection costs. . . . After the individual defaulted in his payments the credit union assigned this claim to a collection agency in an amount representing the balance of the principal amount due and owing plus one‑third of that amount represented as collection costs."
(2) "A contract executed between an individual and an employment agency specified that in case of default payment the individual would be responsible for paying reasonable collection costs. After the individual defaulted in agreed payments the employment agency assigned this claimed obligation to a collection agency in an amount representing the balance of the principal amount remaining due and unpaid plus one‑third of that amount for collection costs."
(3) "The University of Washington obtained a promissory note covering a student loan from an individual and such note provided that in case of default the individual was to pay all collection charges. When this individual was in default, the University of Washington assigned this claim to a collection agency in an amount representing the balance of the principal amount due and owing plus one‑third of that amount for collection costs."
[[Orig. Op. Page 2]] For the reasons set forth in our analysis it is our opinion that collection costs may be recovered by a collection agency in the first situation thus posed and, subject to a qualification set forth in our analysis, in the second as well; however such costs may not be recovered by the collection agency in the third case you have described.
Chapter 19.16 RCW, which codifies the provisions of chapter 253, Laws of 1971, Ex. Sess., regulates the conduct of collection agencies. The basic substantive requirement of the act is set forth in RCW 19.16.110 as follows:
"No person shall act, assume to act, or advertise as a collection agency as defined in this chapter, except as authorized by this chapter, without first having applied for and obtained a license from the director.
". . ."
A collection agency, as defined in RCW 19.16.100(2), means and includes:
"(a) Any person directly or indirectly engaged in soliciting claims for collection, or collecting or attempting to collect claims owed or due or asserted to be owed or due another person;
"(b) Any person who directly or indirectly furnishes or attempts to furnish, sells, or offers to sell forms represented to be a collection system or scheme intended or calculated to be used to collect claims even though the forms direct the debtor to make payment to the creditor and even though the forms may be or are actually used by the creditor himself in his own name;
"(c) Any person who in attempting to collect or in collecting his own claim uses a fictitious name or any name other than his own which would indicate to the debtor that a third person is collecting or attempting to collect such claim."
On the other hand it does not include, in the words of RCW 19.16.100(3):
"(a) Any individual engaged in soliciting claims for collection, or collecting or attempting to collect claims on behalf of a licensee under this chapter, if said individual is an employee of the licensee;
[[Orig. Op. Page 3]] "(b) Any individual collecting or attempting to collect claims for not more than one employer, if all the collection efforts are carried on in the name of the employer and if the individual is an employee of the employer; or
"(c) Any person whose collection activities are carried on in his or its true name and are confined and are directly related to the operation of a business other than that of a collection agency, such as but not limited to trust companies, savings and loan associations, building and loan associations, abstract companies doing an escrow business, real estate brokers, public officers acting in their official capacities, persons acting under court order, lawyers, insurance companies, credit unions, loan or finance companies, mortgage banks, and banks."
Your question involves a later section of the law, RCW 19.16.250, which lists a number of prohibited practices on the part of licensed collection agencies. Insofar as is here pertinent, this section of the law provides that:
"No licensee or employee of a licensee shall:
". . .
"(18) Collect or attempt to collect in addition to the principal amount of a claim any sum other than allowable interest, collection costs expressly authorized by statute, and, in the case of suit, attorney's fees and taxable court costs."
Thus, a collection agency may collect, or attempt to collect, only those collection costs which areexpressly authorized by statute. Absent such express statutory authorization, the collection agency is prohibited from collecting or attempting to collect such costs.
In considering the thrust of this particular prohibition, we note immediately a significant variance between its terms and those of the original version of the bill (Senate Bill No. 796) by which chapter 253, supra, was enacted. In its original form, § 16 of the bill provided, in material part, that:
"No licensee or employee of a licensee shall:
". . .
"(18) Collect or attempt to collect any interest or other charge, fee, or expense incidental to the principal claim unless such interest or incidental fee, charge, or expense is expressly authorized by statute or by the agreement creating the claim and [[Orig. Op. Page 4]] is legally chargeable to the debtor."
Had this language been enacted by the legislature the answer to all three parts of your question would, obviously, be the same ‑ simply because the note, in each case, lawfully contains a "collection costs" clause.
In the first situation you have posited, such a clause is expressly authorized by the following provisions of RCW 31.12.020:
"A credit union is a cooperative society incorporated for the two-fold purpose of promoting thrift among its members and creating a source of credit for them at legitimate rates of interest not to exceed one percent per month on the unpaid balance or the equivalent thereto, for provident, productive, and educational purposes. Credit unions, in the event of default of such credit, may impose financing and reasonable late charges in accordance with their bylaws and may recover reasonable costs and expenses incurred in the collection of any sums due if provided for in the note or agreement signed by the borrower." (Emphasis supplied.)
Likewise, because the employment agency contract described in the second part of your letter would, if a service charge is to be made or if the unpaid balance is payable in more than four installments, constitute a retail installment contract within the meaning of chapter 63.14 RCW, the following provisions of RCW 63.14.090 would appear to sanction a "collection costs" clause in such a contract:
"The holder of any retail installment contract or retail charge agreement may not collect any delinquency or collection charges, including any attorney's fee and court costs and disbursements, unless the contract or charge agreement so provides. In such cases, the charges shall be reasonable, and no attorney's fee may be recovered unless the contract or charge agreement is referred for collection to an attorney not a salaried employee of the holder.
"The contract or charge agreement may contain other provisions not inconsistent with the purposes of this chapter, including but not limited to provisions relating to refinancing, transfer of the buyer's equity, construction permits and title reports."
[[Orig. Op. Page 5]] Finally, insofar as your third factual situation is concerned, it is our understanding that the only student loan program currently being administered by the University of Washington which includes the practice of setting forth a "collection costs" clause in the promissory note is the National Defense Student Loan Program established under 20 U.S.C. §§ 421-429. In connection with this loan program the practice appears to be consistent with § 2010f of the National Defense Student Loan Manual, as published by the Office of the Commissioner of Education, which states, in part:
"The institution may, if it wishes, include in the first sentence of the approved promissory note form the following clause which provides for charging to the borrower the cost of collecting a loan on which payment is past due:
"' . . . together with all attorneys' fees and other costs and charges necessary for the collection of any amount not paid when due.'"
Accordingly, assuming (but not here deciding) the reasonableness of the collection costs clause involved in each of the three promissory notes or contracts which you have described,1/ it will readily be seen that under the original terms of Senate Bill No. 796, as quoted above, the clause would be enforceable not only by the initial lender or other obligee but by a licensee under chapter 19.16 RCW as well. The question which we must here consider, however, is whether a different answer is required in any of the three cases posited by reason of the differing language of RCW 19.16.250(18),supra, as actually enacted into law by the legislature.
In the first two situations you have described, it appears to us that a generally affirmative answer ‑ i.e., an enforceability of the "collection costs" clause by a licensed collection agency to the extent that it is reasonable ‑ may readily be supported even under the amended version of the law. In the first of those two cases, as we have seen, the [[Orig. Op. Page 6]] clause itself is expressly authorized by statute ‑ i.e., RCW 31.12.020, supra. In the second it is also expressly authorized ‑ by RCW 63.14.090, supra, in the case of those employment agency contracts to which the retail installment sales act applies as above explained. On the other hand, although the clause in the University of Washington's student loan promissory note you have described in part (3) of your request appears to be contemplated by the section of the National Defense Student Loan Manual, that manual does not constitute a "statute" within the purview of the final language of RCW 19.16.250(18), as enacted by the legislature.
This does not mean that the clause is unenforceable in a collection proceeding by the university itself ‑ in its own name and through its own employees. See, RCW 19.16.100(3)(b) above. In fact, since chapter 253, Laws of 1971, Ex. Sess., by which this law was enacted, was simply entitled "AN ACT Relating to the regulation of collection agencies; . . ." it necessarily follows that any other reading of it ‑ as bearing upon the legality of a "collection costs" clause as between the original parties to a contract ‑ would be unconstitutional. See, Article II, § 19 of the Washington constitution,2/ and such cases as Price v. Evergreen Cemetery Co., 57 Wn.2d 352, 357 P.2d 702 (1960).
It does appear to mean, however, that if the University of Washington instead should turn a student loan note containing such a clause over to a collection agency, that agency will not, under the present law, be able to utilize the clause so as to collect or attempt to collect the "collection costs" which are provided for therein ‑ unlike the situation in which the agency will find itself in the first two cases described in your opinion request.
If a different result is desired, the legislature can easily accomplish it by amending the statute so as to restore it to the form in which the underlying bill, Senate Bill No. 796, was originally introduced during the 1971 session. From a policy standpoint, it is a bit difficult for us to understand why the change was made in the first place. [[Orig. Op. Page 7]] But it was, and for us to fail to give some meaningful effect to this legislative amendment in answering your questions would be legally improper.
We trust that the foregoing will be of some assistance to you.
Very truly yours,
PHILIP H. AUSTIN
Deputy Attorney General
JOHN R. ELLIS
Assistant Attorney General
*** FOOTNOTES ***
1/You have stated that one‑third of the note or other obligation in each case has been specified as the agreed-to collection charge. The question of whether this would or would not be reasonable in a given case would depend upon all of the facts involved in each such case.
2/"No bill shall embrace more than one subject, and that shall be expressed in the title."