Alston & Bird Consumer Finance Blog

Consumer Financial Protection Bureau (CFPB)

A Closer Look at the CFPB’s Proposed Debt Collection Rules – Part Two: Communications

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A&B Abstract:

This blog post is part two of a five-part series examining the Consumer Financial Protection Bureau’s (the “CFPB” or “Bureau”) proposed rule amending Regulation F (the “Proposed Rule”), which implements the Fair Debt Collection Practices Act (“FDCPA”) to prescribe rules governing the activities of debt collectors.

This post summarizes the key provisions of the Proposed Rule relating to debt collector communications with consumers. These include communications-related provisions regarding:

  • Electronic communications safe-harbor;
  • Opt-out notice requirement;
  • Time and place restrictions;
  • Workplace email addresses;
  • Social media platform communications;
  • Communication media restrictions;
  • “Limited-content” messages; and
  • Telephone call frequency limits.

This post also describes potential issues with certain communications provisions of the Proposed Rule, including uncertainty in scope, application, and operational considerations. The Bureau is currently accepting public comment on the Proposed Rule.

Electronic Communications Safe-Harbor

The FDCPA generally provides that debt collectors may not, without the prior consent of the consumer, communicate in connection with the collection of any debt with any person other than the consumer (15 USC 1692c). However, in the event a debt collector unintentionally violates this rule, FDCPA section 813(c) provides that a debt collector can avoid liability by showing that the violation was not intentional, resulted from a bona fide error, and that it occurred even though the debt collector maintained reasonable procedures designed to avoid the error.

The Proposed Rule applies these concepts expressly to electronic communications, and provides a 3rd-party communication “safe harbor” (12 CFR 1006.6(d)(3)) that sets forth procedures for debt collectors to avoid liability when they unintentionally communicate with an unauthorized third party about a consumer’s debt when trying to communicate with the consumer by email or text message.

This safe harbor would apply when a debt collector maintains procedures that are “reasonably adapted” to avoid an error in sending an email or text message that would result in a violation of the FDCPA’s prohibition against unauthorized 3rd party communications. Specifically, such procedures must include steps to “reasonably confirm and document” that the debt collector electronically communicated with the consumer using one of 3 types of contact information:

  1. An email address or phone number that the consumer recently used to contact the debt collector for purposes other than opting out of electronic communications; or
  2. A non-work email address or a non-work phone number, if the debt collector notified the consumer that it might use that email address or phone number for debt collection communications (and provides certain other disclosures set forth in the rule); or
  3. A non-work email address or a non-work phone number that the creditor or a prior debt collector obtained from the consumer to communicate about the debt if, before the debt was placed with the collector, the creditor or prior collector recently sent communications to that email address or phone number, and the consumer did not request that such address or number cease being used.

The debt collector must also have taken additional steps to prevent communications using an email address or phone number that the debt collector knows has previously led to an unauthorized disclosure to a 3rd party.

Notably, to be protected from liability under this safe harbor, a debt collector would need to show, by a preponderance of the evidence, that the debt collector’s disclosure to the third party was unintentional and that the debt collector did, in fact, maintain the specified procedures.

There are potential issues with this proposal however. For example, it is unclear how Regulation F’s rules regarding electronic communications would interact with other communication regulations such as the Telephone Consumer Protection Act (“TCPA”). It would be helpful for the CFPB to provide guidance on whether Regulation F is meant to supersede TCPA requirements to the extent they are inconsistent. It is also unclear how the CFPB views alternative communication channels such as app-based (push) notifications. That is, would these notifications be treated the same as text messages or emails? Or like phone calls? Or some separate standard since the consumer may be granting authorization when they install the app?

Opt-Out Notice

The Proposed Rule also includes an “opt-out notice” rule (12 CFR 1006.6(e)) which requires that emails, text messages, and other electronic communications include clear and conspicuous instructions for how the consumer can opt-out of receiving such communications.

This rule was designed to limit the frequency of electronic communications sent by debt collectors (since the telephone call frequency limit described in 12 CFR 1006.14(b) wouldn’t apply to emails or text messages), and also to limit any associated costs such communications might impart to consumers. This rule would also prohibit debt collectors from conditioning the opt-out on the payment of any fee or the consumer providing any information other than the email address or phone number they are opting-out.

One potential area of uncertainty regarding the opt-out requirement is what form the opt-out procedure must actually take. That is, while the rule states that the procedure must be described in electronic communications, and the CFPB has noted that a consumer should be able to, “with minimal effort and cost, stop the debt collector from sending further written electronic communications,” the Proposed Rule does not specify any standard for what the collector’s opt-out procedure must look like in terms of the specific steps the consumer must take to opt out. For instance, can a debt collector require that opt-out requests be in writing? Or can they require consumers to call a certain phone number? And would the customer be required to specify one or all electronic communications be subject to the opt-out? The CFPB has requested comments on this proposed rule that may provide insight on these questions.

Time and Place Restrictions

The FDCPA prohibits debt collectors from communicating or attempting to communicate with consumers at times or places that the collector “knows or should know” are inconvenient.  The Proposed Rule regarding time and place restrictions (12 CFR 1006.6(b)(1)) clarifies that calls to mobile phones, as well as text messages and emails, are subject to this prohibition. The CFPB interprets this prohibition to mean that a time before 8:00 a.m. and after 9:00 p.m. local time at the consumer’s location is per se inconvenient, unless the debt collector has knowledge of circumstances to the contrary.

Moreover, the CFPB’s commentary on this proposed rule seeks to clarify two points of ambiguity in the FDCPA rule. First, the CFPB notes that, for purposes of determining the time of an electronic communication under this rule, a communication occurs when the debt collector initiates or sends it, not when the consumer receives or views it. Second, the rule would provide a safe harbor where a debt collector has conflicting or ambiguous information regarding a consumer’s location, such as phone numbers with area codes located in different time zones, or a phone number with an area code and a physical address that are inconsistent. Specifically, under this proposal, the debt collector would not violate the prohibition on communicating at inconvenient times if it communicated with the consumer at a time that would be convenient in all of the locations where the debt collector’s information indicated the consumer might be located. For example, in the time zones related to a consumer’s residence, as well as their mobile phone area code.

However, there are also potential issues with this proposed rule. The first is that the “knows or should know” standard is subjective, and it would be very difficult for debt collectors to interpret subjective consumer statements regarding when and where they do not want to be contacted. For example, if a consumer tells the collector not to communicate with them “at school,” it is unclear what period of time that would cover, since a consumer might only attend classes at night or on certain days of the week. Similarly, it is unclear how debt collectors should approach contacting servicemembers on active duty; that is, where a creditor or debt collector has received active duty orders as part of a request for protections under the Servicemember’s Civil Relief Act, should the debt collector assume that any communication with a servicemember is inconvenient while on active duty? Or is the presumption in favor of attempting to communicate with such servicemembers to notify them of potential issues with their accounts, assuming such contact is made between 8:00 a.m. and 9:00 p.m. local time where the servicemember indicated they are based?

A second issue arises where debts are assigned or transferred. The proposed rule states that a collector should know that communications at any times or places previously identified by the consumer as inconvenient are prohibited. This would place a substantial burden on creditors and servicers to transfer that information along as debts are assigned or transferred during the debt collections process.

Workplace Email Addresses

Regulation F also proposes a rule regarding communications to a consumer’s workplace email address (12 CFR 1006.22(f)(3)). Under this proposed rule, debt collectors are prohibited from contacting a consumer using an email address that the debt collector knows or should know is provided by the consumer’s employer, unless the debt collector has received either: (i) prior consent to use that email address, or (ii) an email from that email address, directly from the consumer. However, a consumer’s prior consent to receive email on their work account from a creditor would not transfer to a debt collector.

The CFPB explained that emails are prohibited where the debt collector can reasonably anticipate that they might be opened and read by someone other than the consumer, and warned that that many employers have a legal right to read messages sent or received by employees on their work email accounts.

We believe the CFPB should provide clarification on several aspects of this proposed rule, including:

  • the circumstances under which a debt collector would be deemed to “know or should know” that the debt collector is emailing a consumer’s work email address and, if so, what circumstances should indicate to a debt collector that an email address is a work email address;
  • what, exactly, constitutes prior consent? For example, if a consumer provides a work email address on their loan application, it is unclear whether that would be considered consent, or whether additional disclosures or consents would be required; and
  • whether this rule would apply only to email contacts with the actual person obligated to pay a debt, or whether it should be broadened to apply to such person’s spouse, parent, guardian, or executor, since the proposed definition of “consumer” under 12 CFR 1006.6(a) includes such persons.

Moreover, because this proposed rule prohibits workplace emails when the debt collector knows that the employer bars its employees from receiving them, this would impose a significant burden on debt collectors since, in order to comply with this requirement, they would need to maintain a database of employers who prohibit such communications, and then block communications to emails on that list.

Social Media Platforms

Regulation F also proposes a rule regulating debt collectors’ communications through social media (12 CFR 1006.22(f)(4)). This proposed rule would prohibit a debt collector from communicating with a consumer in connection with the collection of a debt via social media platform, if such communication is viewable by a person other than the consumer (or certain other persons exempted from this rule).

The CFPB noted that this rule aims to prevent: (1) unauthorized communications with 3rd parties, (2) consumer privacy violations, and (3) harassing, oppressing, or abusing consumers.

It is presumed, though not expressly provided in the text of the proposed rule, that social media communications that are not viewable by third parties, such as those sent through private messaging functions, are not prohibited by this rule. However, there is some risk in this presumption because although such private messages are typically meant only for the targeted individual, it is possible they could be seen or heard by third parties, such as employers or family members, as is the case with other forms of communication (like voicemails). It remains to be seen how the CFPB will reconcile this. One approach to avoid this issue might be for debt collectors to limit the content of such messages to what is permitted under the proposed “limited-content message” definition, described below. However, it is also unclear if such limited-content messages sent via social media – whether public or private – would be deemed “communications” for purposes of the social media communication restrictions, as opposed to in the voicemail context, since the message would likely contain information identifying the sender, as is the case with email.

Communication Media Restrictions

The Proposed Rule’s “prohibited communication media” provision (12 CFR 1006.14(h)) would prohibit debt collectors from communicating with a consumer through any medium that the consumer has requested the debt collector not use. The CFPB explained that once a consumer has requested that a debt collector not use a specific medium to communicate with them, it may be considered harassment, oppression, or abuse of the consumer for the debt collector to continue using that same medium.

There are, however, two exceptions to this rule: First, if a consumer opts out of receiving electronic communications from a debt collector in writing, the debt collector may reply once to confirm the consumer’s request to opt out, provided that the reply contains no information other than a statement confirming the consumer’s request. Second, if a consumer initiates contact with a debt collector using an address or a phone number that the consumer previously requested the debt collector not use, the debt collector may respond once to that consumer-initiated communication (though it is unclear what, if any, restrictions apply to that one response).

A potential issue with implementing this rule is that there may be circumstances where applicable law requires the debt collector to communicate with the consumer only through one specific medium, and does not offer an alternative medium that would be compliant. The Bureau has requested comment with regard to such laws, and whether additional clarification is needed regarding the delivery of legally required communications through a specific medium of communication where the consumer has requested that the debt collector not use that medium.

Limited-Content Message

One of the more interesting and noteworthy proposals under Regulation F is the creation of a “Limited-Content Message” safe harbor, which may resolve the long-standing “Voice Mail Paradox.”

By way of brief background, the voicemail paradox emerged due to the conflict between, on the one hand, the FDCPA requirement that debt collectors provide – in “communications” with consumers – a “mini-Miranda” disclosure identifying themselves as debt collectors, and on the other hand, the FDCPA prohibition against disclosing debt information to 3rd parties. For example, if a debt collector provides no mini-Miranda disclosure in a voicemail message to a consumer when required, it would expose itself to liability; but at the same time, if the debt collector did provide the mini-Miranda disclosure in the voicemail, and a third party overhears that information, the rule prohibiting 3rd party communication may be violated. Federal courts are currently split on how to resolve this issue.

This proposed definition of “Limited-Content Message” (12 CFR 1006.2(j)) provides a possible resolution to the paradox because the limited-content message would not, by definition, be considered a “communication” at all; and therefore, no mini-Miranda disclosure would be required under the FDCPA, and if the message was seen or heard by a third party, it would not constitute a prohibited third-party disclosure.

Specifically, the proposed limited-content message must include all of the following: the consumer’s name, a request that the consumer reply to the message, the name or names of one or more natural persons whom the consumer can contact in reply, a telephone number that the consumer can use to reply, and, if delivered electronically, a disclosure explaining how the consumer can opt-out from receiving such messages.

Additionally, a limited-content message may optionally include one or more of the following: a salutation, the date and time of the message, a generic statement that the message relates to an account, and suggested dates and times for the consumer to reply to the message. Under the CFPB’s interpretation, none of these items, individually or collectively, would convey that the consumer owes a debt or other information regarding a debt.

The CFPB has requested comment on numerous aspects of the limited-content message proposal, including:

  • whether any of the content permitted under this proposed rule should, in fact, be interpreted as conveying information regarding a debt;
  • whether allowing a limited-content message to include a generic statement that the message relates to an “account” raises a risk that the message would convey information about a debt to a third party, or whether there is an alternative statement that would minimize such risk; and
  • whether there is sufficient information required or permitted in the limited-content message to prompt consumers to respond, and if not, what additional information could be included in the message that would not cause the message to constitute a “communication.”

While this safe harbor does present a potential resolution to the voicemail paradox, there has been some industry concern over whether consumers will be less likely to respond to limited-content messages when they don’t know the name of the company trying to reach them. That is, even if the agent provides their personal name as required under the limited content message guidelines, the consumer would still not know the company who is trying to reach them, or the purpose of the call, so they may be less likely to respond. This also gives rise to a concern over whether consumers who do return these calls will complain of being misled or deceived when they return the call and find out it was a debt collection call.

It is also unclear how caller ID functions may have an impact on the limited-content message provisions, since caller IDs may display the debt collection agency’s name, and such information would fall outside of the limited content permitted under the proposed rule. Notably, limited-content messages are not permitted via email, because the sender’s email address may disclose its identity, so it is not clear why a caller ID identification would be treated differently. Moreover, it is unclear how the limited-content message safe harbor would interact with state laws that require certain disclosures be contained in all debt collector communications with consumers. It is possible that industry comments – which are currently being submitted to the CFPB – may address these concerns.

Telephone Call Frequency Limits

Finally, Regulation F also proposes a rule limiting the number of telephone calls a debt collector may place to a consumer about a particular debt, and making a violation of such limit a per se violation of the FDCPA’s prohibition on repetitive or continuous calling, and the Dodd-Frank Act’s UDAP provisions (12 CFR 1006.14(b)). Specifically, this call frequency limit would prohibit debt collectors from:

  • calling a consumer about a particular debt more than seven times within a seven-day period; or
  • engaging in more than one telephone conversation with a consumer about a particular debt within a seven-day period.

Notably, the Bureau does not propose subjecting email, text messages, or other electronic communications to the proposed frequency limits – it would apply only to telephone calls.

There are also certain types of phone calls excluded from the proposed frequency limits which do not count toward, and are permitted in excess of, such limits. In particular:

  1. calls made to respond to a request for information from the consumer;
  2. calls made with the consumer’s prior consent given directly to the debt collector;
  3. calls that are not connected to the dialed number; or
  4. calls with the consumer’s attorney; a consumer reporting agency; the creditor; the creditor’s attorney; or the debt collector’s attorney.

The CFPB has left open several questions regarding the proposed call frequency limits, to which we expect industry participants to respond during the comment period. These include:

  • whether the frequency limit should be set at seven calls to a particular consumer within seven days, or whether that limit should be higher or lower;
  • whether the frequency of calls should be measured on a per-week basis as currently proposed, or some alternate time period such as a daily or monthly limit;
  • whether calls placed about a particular debt to different telephone numbers associated with the same consumer should be counted together in aggregate for purposes of determining whether a debt collector has exceeded the proposed call frequency limit; and
  • whether the frequency limits should be applied on a per-debt, rather than on a per-consumer, basis. For example, under the current proposed rule, a debt collector who is attempting to collect two debts from the same consumer can permissibly place up to 14 calls in one week to that consumer.

 

Part 3 of this blog series on Regulation F will address proposed requirements regarding disclosures and other debt collector conduct.

QM Patch Update: CFPB Proposes to Let Patch Expire

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A&B Abstract

The CFPB has issued an Advance Notice of Proposed Rulemaking regarding the fate of the “QM Patch,” indicating that it will not extend the “QM Patch” permanently.

Advanced Notice of Proposed Rulemaking

In a surprise development, on July 25, 2019, the Consumer Financial Protection Bureau (“CFPB”) issued an advance notice of proposed rulemaking (“ANPR”) seeking public comment regarding the fate of the “QM Patch,” which is scheduled to expire no later than January 10, 2021.   The comment period is short, reflecting the urgency of promulgating a final rulemaking before the impeding “QM Patch” termination.  Comments must be received by the CFPB within 45 days after publication of the ANPR in the Federal Register.

Background

The CFPB created the “QM Patch” as a temporary provision of the qualified mortgage (“QM”)/ability-to-repay (“ATR”) regulations adopted pursuant to the Dodd-Frank Act.  It exempts lenders from having to underwrite loans with debt-to-income (“DTI”) ratios not exceeding 43% in accordance with the exacting standards of Appendix Q to Regulation Z if the loans otherwise meet the definition of a QM and are eligible for purchase by, among others, Fannie Mae and Freddie Mac.

The CFPB’s Proposal

In seeking public comment in the ANPR, however, the CFPB announced that it does not intend to extend the “QM Patch” permanently.  This shocking pronouncement has potentially profound ramifications for the residential mortgage lending markets.  A substantial proportion of the markets have relied extensively on the “QM Patch” in underwriting qualified mortgages, not to mention significantly reducing the role of the GSEs in these markets.  For years, GSE critics have complained about Fannie Mae’s and Freddie Mac’s dominance of the residential lending markets.  Yet the January 2021 “QM Patch” expiration would raise critical questions:  Will the private markets be able to absorb the GSE’s large share of qualified mortgage lending?  If not, what are the possible detrimental impacts on consumers, especially those in distressed communities?

Other QM Changes?

In the ANPR, the CFPB indicates that it may make other significant changes to the qualified mortgage regulations, based in part on the public comments it receives.  For example, the CFPB is considering whether the general QM definition should retain a direct measure of a consumer’s personal finances, such as DTI or residual income and how that measure should be structured. The CFPB is also seeking comment on whether the definition should: (1) include an alternative method for assessing financial capacity, or (2) be limited to the express statutory criteria.  Under one approach that seems to be attracting the CFPB’s interest, bright-line pricing delineation would replace the DTI criteria altogether.   Under such an approach, loans with APRs exceeding the average prime offer rate by certain thresholds would be deemed rebuttable presumption QM loans or non-QM loans, as the case may be.  Loans not exceeding certain thresholds would receive safe harbor QM status.   Under such a bright line pricing delineation method, the loans would have to comply with other statutory criteria in order to retain QM status.

Takeaway

The 45-day deadline for comments seems rushed, especially considering the dramatic effect that changes to the qualified mortgage rules could have on the residential mortgage finance and housing markets.  Further, in an ideal world, the CFPB should be considering amendments of the qualified mortgage/ability-to-repay rules in tandem with the federal high cost mortgage, the residential mortgage risk retention, and the loan originator compensation rules as a holistic approach rather than in isolation.

A Closer Look at the CFPB’s Proposed Debt Collection Rules – Part One

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A&B Abstract:

On May 7, 2019, the Consumer Financial Protection Bureau (the “CFPB” or “Bureau”) issued a proposed rule that would significantly amend Regulation F (the “Proposed Rule”), which implements the Fair Debt Collection Practices Act (“FDCPA”), to prescribe rules governing the activities of debt collectors that are subject to the FDCPA.  The Bureau recently extended the comment period from August 19, 2019 to September 18, 2019.

Overview of Blog Series

This blog post is part one of a five-part series that will take a deeper dive into the topics covered by the Proposed Rule as well as those issues the Bureau has chosen not to address.  This five-part series will cover the following topics:

  • Part one will provide a brief history of the FDCPA and the Proposed Rule and provide a high-level overview of the Proposed Rule’s coverage and scope of applicability and a summary of the Proposed Rule’s most impactful provisions.
  • Part two will discuss the Proposed Rule’s communication requirements, including (i) time and place restrictions, (ii) restrictions on telephone call volume, (iii) text and email communications, and (iv) resolution of the “voicemail paradox” through the use of limited-content messages.  In addition, this part will focus on the operational challenges created by the Proposed Rule and what debt collectors should be thinking about when considering whether to submit comments to the Bureau.
  • Part three will address the Proposed Rule’s disclosure requirements, including (i) expanded requirements for Validation of Debt notices, (ii) a safe harbor for use of the Bureau’s new proposed model Validation of Debt form, and (iii) requirements for the provision of electronic disclosures.
  • Part four will discuss the Proposed Rule’s conduct provisions, including provisions addressing (i) decedent debt, (ii) time-barred debt, (iii) credit reporting restrictions, and (iv) transfers of debt.
  • Finally, part five will discuss several issues that are not addressed by the Proposed Rule, whether the provisions of the Proposed Rule could be applied to first-party collection activities based on UDAAP principles, and the potential interplay between the Proposed Rule and state debt collection laws.

History of the FDCPA and the Proposed Rule

For decades the FDCPA was enforced by the Federal Trade Commission (“FTC”).  However, prior to the Dodd-Frank Act, no federal regulator had rulemaking authority under the FDCPA.  As a result, the FDCPA was the subject of countless, and often times inconsistent, interpretations fashioned by the courts and federal regulators.

When the Dodd-Frank Act transferred the FDCPA from the FTC to the CFPB, it also empowered the Bureau with rulemaking authority to prescribe regulations with respect to the collection of debts by debt collectors, as defined by the FDCPA.  The Bureau began this process in 2013 by issuing an Advanced Notice of Proposed Rulemaking (“ANPR”).  Following the ANPR, the Bureau, in conjunction with the Office of Management and Budget and the Small Business Administration’s Chief Counsel for Advocacy, convened a Small Business Regulatory Enforcement Fairness Act panel in 2016 to consult with representatives of small businesses that might be affected by the rulemaking.

With its issuance of the Proposed Rule, the Bureau has taken the first step in providing industry with clearer rules of the road in applying the provisions of the FDCPA to modern debt collection practices.

Below we provide a high-level overview of the Propose Rule’s most significant provisions.

Overview of Proposed Rule

The provisions of the Proposed Rule can be broken into the following categories:

  • Coverage and Scope of Applicability
    • Proposed Covered Persons
      • Who is a “Debt Collector”?  The Proposed Rule’s proposed definition of “debt collector” generally restates the FDCPA’s definition of “debt collector,” including the exceptions, with only minor wording and organizational changes for clarity.
      • Who is a “Consumer”?  Similarly, the Proposed Rule would largely restate the FDCPA’s definition of “consumer.”  However, the Bureau proposes to interpret the term to include a deceased natural person who is obligated or allegedly obligated to pay a debt.  Similarly, for purposes of certain communications provisions, the Proposed Rule interprets the term “consumer” to include a confirmed successor-in-interest and the personal representative of a deceased consumer’s estate.
    • Proposed Covered Products
      • Consumer Financial Product or Service Debt:  While the Proposed Rule generally restates the FDCPA’s definition of “debt,” with only minor wording and organizational changes, certain parts of the Proposed Rule would only apply when a debt collector covered by the FDCPA is collecting debt related to a “consumer financial product or service” as defined in the Dodd-Frank Act.
  • Conduct and Communication Provisions:  The Proposed Rule would:
    • Electronic Communications Generally: Identify safe harbor procedures for debt collectors who unintentionally communicate with an unauthorized third party about a consumer’s debt when trying to communicate with the consumer by email or text message.
    • Option to Opt-Out: Require a debt collector to include, in emails, text messages, and other electronic communications, an option for the consumer to opt-out from such future communications.
    • Communication Media Restrictions: Prohibit a debt collector from communicating or attempting to communicate with a consumer through a medium of communication that the consumer has requested the debt collector not use, such as a specific telephone number or email address.
    • Time and Place Restrictions for Electronic Communications: Clarify that calls to mobile telephones and electronic communications, such as texts and emails, are subject to the FDCPA’s prohibition on communicating at unusual and inconvenient times and places.
    • Use of Workplace Email Addresses: Unless an exception applies, prohibit a debt collector from contacting a consumer using an email address that the debt collector knows or should know is provided by the consumer’s employer.
    • Social Media Platforms: Prohibit debt collectors from contacting consumers through social media platforms, unless such contact is made through the platform’s private messaging function.
    • Limited-Content Message: Define, and provide example language for, a “Limited-Content Message” that a debt collector could send by, for example, voicemail or text. The content of a Limited-Content Message would not be considered a “communication.” Thus, if a Limited-Content Message is heard or observed by a third party, it would not constitute a prohibited third-party disclosure.
    • Telephone Call Frequency Limits: Prohibit a debt collector from calling a consumer about a particular debt more than seven times within a seven-day period, subject to certain limited exceptions. The proposal would also prohibit a debt collector from engaging in more than one telephone conversation with a consumer about a particular debt within a seven-day period. As a result, a debt collector who stays within the proposed limits would not be found to have engaged in repeated or continuous telephone calls or conversations with the intent to harass, as prohibited by the FDCPA.
    • Decedent Debt:  Clarify how and with whom a debt collector can communicate about a deceased consumer’s debt, as well as how the requirements regarding validation notices and disputes apply after a consumer passes away.
    • Time-Barred Debt: Prohibit a debt collector from suing or threatening to sue on time-barred debt if the debt collector knows or should know that the applicable statute of limitations has expired.
    • Communicating Before Credit Reporting: Prohibit a debt collector from reporting collection items to consumer reporting agencies unless the debt collector has already communicated with the consumer.
    • Transfers of Debt: Unless an exception applies, prohibit a debt collector from transferring a debt to another debt collector if the debt collector knows or should know that the debt has been paid or settled, the debt has been discharged in bankruptcy, or an identity theft report has been filed with respect to the debt.
  • Disclosure Requirements:  The Proposed Rule would:
    • Provision of Electronic Disclosures: Generally, require a debt collector to provide required disclosures in a manner that is reasonably expected to provide actual notice, and in a form that the consumer may keep and access later. Debt collectors who provide the required disclosures electronically would need to either comply with the E-SIGN Act or a set of alternative procedures. The Proposed Rule would also impose certain requirements related to the delivery and format of required electronic disclosures.
    • Validation Notice: Require a debt collector to include in the validation of debt notice certain information about the debt, including (i) the account number and an itemization of the debt, (ii) certain information about consumer protections, such as information about the right to dispute a debt, and (iii) a consumer response form that consumers could use to take certain actions, such as submitting a dispute or requesting the original creditor’s information.  In addition, the Proposed Rule would permit a debt collector to (i) include statements in the validation of debt notice informing consumers how they may request the notice in Spanish, if the collector chooses to provide a Spanish-language translation, and (ii) provide a validation notice translated into any language, if the debt collector also sends an English-language validation notice in the same communication or if the debt collector previously sent an English-language validation notice.
    • Model Validation Notice: Permit a debt collector to comply with FDCPA’s validation of debt provisions and the Proposed Rule’s disclosure requirements by using proposed Model Form B-3.

Takeaway

The issuance of the Proposed Rule clearly reflects the investment of significant time and consideration by the Bureau. As the Proposed Rule is significant in scope, we expect the Bureau will engage in a similar undertaking as it considers comments submitted by debt collectors and other industry stakeholders.

The Fate of the QM Patch

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A&B Abstract:

With the January 2021 expiration of the so-called “QM Patch” looming, what courses of action are available to the CFPB?

Background

One of the most vexing issues currently facing the Consumer Financial Protection Bureau (“CFPB”) is the fate of the so-called “QM Patch”.  The CFPB’s ability-to-repay/qualified mortgage regulations promulgated pursuant to the Dodd-Frank Act require creditors to make a reasonable, good-faith determination at or before consummation that a consumer will have a reasonable ability to repay the loan according to its terms.  (The obligation applies to a consumer credit transaction secured by a dwelling.)

The regulations provide:

  • a “safe harbor” for compliance with the ability-to-repay rules to creditors or assignees of loans that satisfy the definition of a qualified mortgage and are not higher-priced mortgage loans; and
  • a “rebuttable presumption” of compliance with the ability-to-repay rules to creditors or assignees for higher-priced mortgage loans.

A “higher-priced mortgage loan” has an APR exceeding the average prime offer rate by 1.5 or more percentage points for first-lien loans, or by 3.5 or more percentage points for subordinate-lien loans.

What is the QM Patch?

In many instances, in order for a loan to achieve QM status, it must be underwritten in accordance with exacting standards of Appendix Q.  However, the CFPB regulations eliminate this particular requirement if the loan is eligible for purchase by, among others, Fannie Mae and Freddie Mac.  Consequently, a loan satisfies the QM Patch if it can be sold to one of the GSEs, and meets certain other QM criteria.  (Such criteria include that the points do not exceed the three percent threshold, and the loan is fully amortizing and doesn’t have a term exceeding 30 years.)

The QM Patch has significantly enhanced the presence of the GSEs in the QM market, as the GSEs are in effect backstopping the underwriting of these loans.   The regulations scheduled this exemption to expire upon the earlier of the termination of the conservatorship of the particular GSEs or January 10, 2021.  What the rule did not anticipate is that the conservatorship of the GSEs would continue years after the effective date of the CFPB regulations.  With no conservatorship termination in sight, the January 2021 QM Patch expiration looms large.  Indeed, the CFPB must act soon to enable the market to adjust to any significant departures from the current arrangement.

How Might the CFPB Address the QM Patch’s Pending Expiration?

The CFPB has a number of options at its disposal.  First, it could opt to extend the current QM Patch.  Logistically, this may be the path of least resistance.  However, to GSE critics who want to shrink the government mortgage footprint, this option is unpalatable. These critics believe that the QM Patch impact is too substantial and that the GSE backstop crowds out the private sector.  The open question is whether the private sector could realistically absorb the market share currently held by the GSEs through the current QM Patch.

Second, the CFPB could eliminate both the QM Patch and Appendix Q and create a level playing field for the QM market.  This approach would retain most of the ATR/QM product eligibility features and a bright line delineation between Safe Harbor and Rebuttable Presumption QM loans based upon the APR.  This option would eliminate the current debt-to-income ratio requirements, but ensure that only the most low risk loans be accorded the Safe Harbor QM designation.

Third, the CFPB could eliminate the QM Patch and Appendix Q and permit lenders to underwrite loans to an established underwriting guide such as the FHA.  The challenge for this approach is identifying a benchmark that is acceptable to a wide range of the market.

Other options at the CFPB’s disposal include: (1) allowing the lender to underwrite using its own approved and validated underwriting model (while retaining the other components of the ATR/QM criteria, including the Safe Harbor/Rebuttable Presumption bright line tests; and (2)  appointing industry stakeholders to create a de novo AUS that everyone would ultimately use.

Takeaway

With the January 2021 deadline looming, the CFPB needs to act soon to enable markets to adjust to the QM Patch replacement.

Will the CFPB find its Voice on “Abusiveness”?

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On June 25, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) kicked off its symposia series with a panel discussion of whether the Bureau should use its rulemaking authority to further define “abusive acts or practices.”  The Dodd-Frank Act added a prohibition on abusive acts and practices to the established prohibition on unfair acts and practices, changing the acronym UDAP to UDAAP.  Over the years Federal Trade Commission (“FTC”) policy statements, enforcement actions, and judicial precedents have defined the prohibitions on “unfair” and “deceptive” conduct.  The abusiveness standard is less developed.

What is “abusive”?

The Dodd-Frank Act makes it unlawful for any covered person or service provider to engage in an “abusive act or practice,” which is one that:

  • materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
  • takes unreasonable advantage of -(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;(B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or(C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

Symposium discussion

 The Bureau convened a panel of academics and regulatory and industry experts who debated:

Should the CFPB define abusiveness?

Only one panelist argued that the Bureau doesn’t have rulemaking authority, despite the express authority granted by the Dodd-Frank Act.  Most agreed that further guidance would be helpful.

Is now the time to further define abusiveness?

While most agreed that further guidance would be helpful, there was much disagreement on whether the CFPB should be the one to issue such guidance. Some participants argued that because the Bureau cannot anticipate the types of problems to address, it should follow the FTC’s example and develop the definition over time through the common law process.  To that end, one panelist cautioned that the Bureau should be careful to not tie its hands too prematurely. By contrast, others argued strongly for the need for guidance that provides boundaries and limiting principles. Legal and compliance professionals require such guidance to facilitate compliance and to provide direction to their companies.  One panelist argued that the Bureau’s current “know it when you see it approach” would be better served with concrete examples.

What form should guidance take? 

Recognizing that promulgating a rule would be a long process, some argued an industry specific no-action letter, or even a discussion in the Bureau’s supervisory highlights, would be appropriate.  Other panelists want more permanence and advocated for a policy statement as a measured next step.

What does abusiveness mean? 

Here, there was a healthy debate.  The panelists considered questions including:

  • Does the abusiveness standard preclude a cost benefit analysis?
  • Should abusiveness be tied to suitability of product rather than reasonableness of the consumer?  Should the definition be tied to specific industries?
  • Is it an individualized inquiry focusing on “a consumer”?
  • Should we look for guidance at the SEC 10(b)(5) rule, or to the laws of other countries (such as Australia), or strictly follow the statutory language?
  • What does behavioral economics tell us?
  • Should abusiveness be defined by example?
  • Is abusive completely separate from unfair or deceptive or is there overlap?

To the last point, the CFPB exam manual provides that “[a]lthough abusive acts also may be unfair or deceptive, examiners should be aware that the legal standards for abusive, unfair and deceptive are each separate.”

What comes next?

What the Bureau will do with the information gathered during the symposium is not clear.    We do know that the CFPB is planning on holding more symposia.  Specifically, the Bureau has announced that future topics will include small business loan data collection, disparate impact and ECOA, cost benefit analysis, and consumer authority for financial data sharing.