The Compliance Mistake That Could Get You Sued (Or Dropped by Clients)
If you’re running a third-party collection agency in 2025, you already know the compliance landscape is getting more complex. But here’s a question that might keep you up at night: Are you charging illegal fees without even realizing it?
Between state law variations, outdated client contracts, and legacy software that doesn’t auto-adjust for fee rules, it’s easier than ever to fall out of compliance. And that mistake can cost you more than just a slap on the wrist—it could lead to lawsuits, consumer disputes, and even lost client relationships.
So let’s break it down: what makes a fee illegal, what debt validation requires, and how you can protect your agency with better workflows, smarter tech, and airtight documentation.
Why Debt Validation Is Your First Line of Defense
Debt validation is the foundation of all collection efforts. The Fair Debt Collection Practices Act (FDCPA) and Regulation F require you to send a validation notice within five days of first contact. This notice must include the amount of the debt, the name of the creditor, and clear instructions for the consumer’s rights to dispute or request more information.
Here’s what you’re legally required to provide in your debt validation notice:
- The amount owed, broken down by principal, interest, and any fees
- The name of the creditor (and any prior owners of the debt)
- A statement that the consumer has 30 days to dispute the validity of the debt
- The mailing address where consumers can send a debt verification letter
- The right to request the original creditor’s name if different from the current one
The Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) both list inadequate validation as one of the top reasons for consumer complaints and enforcement actions.
The 2-Part Test: Are Your Fees Legal?
If you’re charging interest, late fees, or processing charges, ask yourself these two questions:
- Was this fee authorized by the original creditor in the contract?
- Does applicable state law allow it?
If the answer to either is “no” or “I’m not sure,” you could be at risk.
Many agencies get tripped up by charging interest on credit card debt or medical bills without confirming whether it was allowed in the original agreement—or whether it’s still enforceable based on the statute of limitations.
Some states ban interest after default. Others have specific rules on itemization, return receipt requirements, or how to treat time-barred debt. For example, New York and California have particularly aggressive consumer protection laws. Others, like Washington, have their own rules around communication frequency, disclosure, and verification timelines.
Learn more: Modern Debt Collection Solutions | State Laws Agencies Must Know
3 Common Compliance Mistakes Around Fees
1. Charging Fees on Time-Barred Debts
If a debt is past the statute of limitations in your state, it may be uncollectible—or collectible only under specific restrictions. Adding interest to time-barred debts could violate both federal law and state law.
2. Not Recognizing State Limits of Fees
Even if the original creditor’s agreement with the debtor allows for collection fees to be added upon delinquency, many states have limits. For example, New York state allows a maximum of 22% of the principal amount to be added as a collection fee. If a creditor and a debtor are in 2 different states, it’s best practice to be on the safe side and follow the strictest regulations.
3. Relying on Old Software That Can’t Adapt by State
If your platform doesn’t dynamically adjust or limit fees based on debtor location or client contract, you could be automatically applying illegal fees. That’s why more agencies are switching to modern systems like Aktos, which can automate dispute tracking, state-specific rules, and real-time compliance logic across jurisdictions.
Learn more: Best Debt Collection Software for 2025 | Aktos
Regulators Are Watching: What the FTC, CFPB, and AGs Care About
In 2022, the CFPB reported over 77,000 complaints related to debt collection—and over $3 billion in consumer restitution stemming from illegal practices. The FTC also warns against charging fees that aren't explicitly allowed by contract or law.
State attorney general offices are taking action too. Several AGs—including those in California, New York, and Colorado—have filed suits against agencies for excessive fees, false threats of legal action, or inaccurate reporting to credit bureaus.
If your agency is sending balances to credit reporting agencies that include improper fees, you’re not just violating the FDCPA—you may be breaking FCRA regulations too.
5 Best Practices for Staying Compliant and Protecting Your Agency
- Validate Before You Collect: Never initiate collection without a legally valid debt validation notice.
- Don’t Auto-Apply Fees Without Logic: Interest and late fees should be applied only after passing your internal “contract + state law” checklist.
- Customize by State: Use software that applies rules based on debtor geography (e.g., stricter laws in NY, WA, CA).
- Log All Communications: Phone calls, SMS, emails, and letters should be automatically logged, time-stamped, and audit-ready.
- Train Staff With Real-World Examples: Use sample letters, real disputes, and agency-level feedback to create better scripts and processes.
How Aktos Helps Automate Compliance at Scale
Modern agencies are ditching legacy systems that require guesswork and switching to tools like Aktos that:
- Automatically generate and send state-specific validation notices
- Auto-suppress interest during disputes or when a debt is time-barred
- Log every call, message, and letter with detailed audit trails
- Integrate directly with your payment processors, client systems, and credit bureaus
- Automatically apply (and limit) collection fees to newly placed accounts depending on state
With built-in automation and compliance workflows, you don’t have to gamble with risky assumptions or pray your agents follow the right script. Want to learn more about Aktos? Speak to an expert today.
Final Thoughts: Don’t Let a $25 Fee Destroy a $2 Million Client Relationship
It’s easy to overlook small fees—especially when you’re juggling high volumes, demanding clients, and old systems. But to regulators and consumers, those fees can represent a serious violation of their rights.
In 2025, the agencies that win are the ones that combine human expertise with automation. They validate, verify, and communicate clearly—without needing a law firm on retainer or burning hours on dispute handling.
Your agency doesn’t need more staff—it needs better tools, smarter compliance, and debt validation you can trust.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Debt collection agencies should consult with legal counsel to ensure compliance with all applicable federal and state regulations.
