Alston & Bird Consumer Finance Blog

Consumer Loan

NY DFS unveils Consumer Protection Task Force, adds Former CFPB Deputy Director

By

A&B ABstract:

Less than one month into the new year, New York’s Department of Financial Services (DFS) has taken strong measures to make good on its proclamation that  “2020 must be the year of the consumer” by: (1) unveiling a 12-member Consumer Protection Task Force to help implement an extensive consumer protection agenda; and (2) adding former CFPB Deputy Director Leandra English as a special policy advisor to the Superintendent.

The Consumer Protection Task Force

On January 9, Superintendent Lacewell announced the roll-out of a 12-member Consumer Protection Task Force to “further DFS’ mission to protect consumer as the federal government rolls back important consumer protections.”  In his annual State of the State, Governor Cuomo expressed his belief that with the current Administration’s “rolling back of consumer protections and regulations, Americans are more exposed to predatory and abusive practices than at any time since the 2008 financial crisis.”  The DFS press release noted that one of the task force’s immediate focuses will be to help bring to fruition “the extensive consumer protections proposals included in Governor Cuomo’s 2020 State of the State agenda” which includes such initiatives as: (1) licensing and regulating debt collection companies; (2) the codification of a Federal Trade Commission rule banning confessions of judgment; (3) strengthening the state’s consumer protection laws to protect against unfair, deceptive, and abusive practices; (4) cracking down on elder financial abuse; and (5) increasing access to affordable banking services.

According to the DFS, task force members will “provide formal input on the [DFS’] consumer engagement, policy development and research” in order to “ensure that consumer’s always come first as the [DFS] develops policies and regulates the financial services industry.”  The 12-member committee consists of: (1) Chuck Bell, Programs Director for the advocacy division of Consumer Reports; (2) Elisabeth Benjamin, Esq., Vice President of Health Initiatives at the Community Service Society; (3) Carolyn Coffee, Esq., Director of Litigation for Economic Justice at Mobilization for Justice; (4) Beth Finkel, State Director for the New York State Office of the AARP; (5) Jay Inwald, Esq., Director of Foreclosure Prevention at Legal Services NYC; (6) Paul Kantwill, Esq., Distinguished Professor in Residence and Executive Director, Rule of Law Program at Loyola University Chicago School of Law; (7) Neha Karambelkar, Esq., Staff Attorney at Western New York Law Center; (8) Kristen Keefe, Esq., Senior Staff Attorney with the Consumer Finance and Housing Unit at Empire Justice Center; (9) Peter Kochenburger, Esq., Executive Director of the Insurance LLM Program and Deputy Director of the Insurance Law Center at the University of Connecticut Law School; (10) Sarah Ludwig, Esq., Co-Director of New Economy Project; (11) Frankie Miranda, Executive Director at the Hispanic Federation; and (12) Cy Richardson, Senior Vice President at the National Urban League.

Superintendent Lacewell noted that, as the federal government, in her words, “dismantles consumer protections across the board, New York has intensified its commitment” to “further solidify New York’s reputation as the consumer protection capital of America.” Lacewell added that, “[w]ith the federal government stepping down and refusing to enforce critical consumer protection law, we must make 2020 the Year of the Consumer.”

NY DFS Adds Former CFPB Deputy Director Leandra English

On January 14, 2020 the DFS announced that former CFPB Deputy Director Leandra English would be joining the DFS as a special policy advisor reporting directly to Linda Lacewell.  According to the press release, Ms. English will “help develop policy initiatives and manage DFS’ consumer protection agenda” and her appointment “strengthens the mission of the [DFS] to protect and empower New York consumers as Washington continues to roll back on consumer protections.”  Ms. English is well known for leaving the CFPB after having been appointed acting director by departing director Richard Cordray only to see the President’s administration issue a dual appointment, naming Mick Mulvaney as acting director.  The ensuing legal dispute reached the U.S. Court of Appeals for the D.C. Circuit before Ms. English ultimately resigned.

Ms. English’s most recent work was as Director of Financial Services Advocacy for the Consumer Federation of America (CFA), a “national nonprofit organization dedicated to advancing the consumer interest through research, advocacy, and education.”  One of Ms. English’s initiatives in that role was to support the Forced Arbitration Injustice Repeal Act (H.R. 1423), known as the “FAIR” Act, which would eliminate compulsory arbitration in consumer contracts and was passed by the House of Representatives in the Fall by a 225-186 vote.  Upon the bills passage, Ms. English commented that, “Americans deserve their day in court, but when companies force consumers into signing away their rights, the chances of a fair outcome diminish drastically. We thank the House for taking this important step in eliminating these clauses from contracts for products consumers use every day including credit cards and checking accounts. We now need the Senate to act to protect consumers.”

Takeaway

As the DFS continues its push to strengthen protections for New York consumers in 2020, it will be interesting to watch how such initiatives impact the DFS’ investigative and enforcement priorities.  Moreover, as New York is a bellwether state, it will be interesting to see whether other states follow suit.

CFPB Issues Its Fall 2019 Rulemaking Agenda

By ,

A&B Abstract:

On November 20, 2019, the Consumer Financial Protection Bureau (the “Bureau” or “CFPB”) published its Fall 2019 Rulemaking Agenda (the “Rulemaking Agenda”) as part of the Fall 2019 Unified Agenda of Federal Regulatory and Deregulatory Actions. The Rulemaking Agenda sets forth the matters that the Bureau reasonably anticipates having under consideration during the period from October 1, 2019 to September 30, 2020.  The Rulemaking Agenda is the first Unified Agenda prepared by the CFPB since Director Kraninger embarked on her “listening tour” shortly after taking office in December 2018. Below we highlight some of the key agenda items discussed in the Rulemaking Agenda.

Implementing Statutory Directives

In the Rulemaking Agenda, the Bureau indicates that it is engaged in a number of rulemakings to implement directives mandated in the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (“EGRRCPA”), the Dodd-Frank Act and other statutes.  For example:

Truth in Lending Act

In March 2019, the Bureau published an Advanced Notice of Proposed Rulemaking (“ANPR”) seeking public comment relating to the implementation of section 307 of the EGRRCPA, which amends the Truth in Lending Act (“TILA”) to mandate that the Bureau prescribe certain regulations relating to “Property Assessed Clean Energy” (“PACE”) financing.  The Bureau indicated that it is reviewing the comments it has received in response to the ANPR as it considers next steps to facilitate the development of a Notice of Proposed Rulemaking (“NPRM”).

TRID Rule Guidance

The Bureau has also been engaged in several other activities to support its rulemaking to implement the EGRRCPA.  For example, the Bureau noted that it has (i) updated its small entity compliance guides and other compliance aids to reflect the EGRRCPA’s statutory changes; and (ii) issued written guidance as encouraged by section 109 of the EGRRCPA, which provides that the Bureau “should endeavor to provide clearer, authoritative guidance” on the CFPB’s TILA/RESPA Integrated Disclosure rule.

Implementation of Section 1071 of Dodd-Frank

Additionally, the Bureau is undertaking certain activities to facilitate its mandate to prescribe rules implementing Section 1071 of the Dodd-Frank Act, which amended the Equal Credit Opportunity Act to require financial institutions to collect, report, and make public certain information concerning credit applications made by women-owned, minority-owned, and small businesses.  For example, on November 6, 2019, the Bureau hosted a symposium on small business data collection in order to facilitate a discussion with outside experts on the issues implicated by creating such a data collection and reporting regime.

We have previously issued an advisory in which we discuss the key mortgage servicing takeaways from the EGRRCPA.

Continuation of the CFPB’s Spring 2019 Rulemaking Agenda

The Rulemaking Agenda notes that the Bureau will continue with certain other rulemakings that were described in its Spring 2019 Agenda that are intended to “articulate clear rules of the road for regulated entities that promote competition, increase transparency, and preserve fair markets for financial products and services.”  Such rulemakings include:

HMDA and Regulation C

In May 2019, the Bureau issued a NPRM to (i) reconsider the thresholds for reporting data about closed-end mortgage loans and open-end lines of credit under the Bureau’s 2015 Home Mortgage Disclosure Act (“HMDA”) Rule and to incorporate into Regulation C an interpretive and procedural rule that the Bureau issued in August 2018 in order to implement certain partial HMDA exemptions created by the EGRRCPA.  In summer 2020, the Bureau is expecting to issue an NPRM to follow-up on an ANPR issued in May 2019 related to data points and coverage of certain business- or commercial-purpose loans.  The Bureau also anticipates issuing a NPRM addressing the public disclosure of HMDA data in light of consumer privacy interests to allow the Bureau to concurrently consider the collection and reporting of data points and the public disclosure of those data points.

Proposed Regulation F

In May 2019, the Bureau issued a NPRM which would, for the first time, prescribe substantive rules under Regulation F, which implements the Fair Debt Collection Practices Act, to govern the activities of debt collectors (the “Proposed Rule”). The Proposed Rule would address several issues related to debt collection, such as (i) addressing communications in connection with debt collection; (ii) interpreting and applying prohibitions on harassment or abuse, false or misleading representations, and unfair practices in debt collection; and (iii) clarifying requirements for certain consumer-facing debt collection disclosures.  The Bureau noted that it is also engaged in testing of consumer disclosures relating to time time-barred debt disclosure issues that were not part of the Proposed Rule.  The results of the CFPB’s testing will inform the Bureau’s assessment of whether to issue a supplemental NPRM seeking comments on any disclosure proposals related to the collection of time-barred debt.

We previously published a five-part blog series in which we discussed the provisions of the Proposed Rule that are under consideration. We will continue to monitor and report on any developments related to the Proposed Rule.

Payday, Vehicle Title, and Certain High-Cost Installment Loans (the “Payday Rule”)

The Bureau is expecting to take final action in April 2020 on the NPRM issued in February 2019 related to the reconsideration of the mandatory underwriting requirements of the 2017 Payday Rule.  That said, we note that the U.S. District Court for the Western District of Texas has stayed the Payday Rule’s August 19, 2019 compliance date. The parties before the court have a status hearing on December 6, 2019 which could affect the stay and the effective date of the Payday Rule.

Remittance Rule

In addition, the Rulemaking Agenda notes that the Bureau is planning to issue a proposal this year to amend the CFPB’s Remittance Rule to address the effects of the expiration in July 2020 of the Rule’s temporary exception allowing institutions to estimate fees and exchange rates in certain circumstances.

New Rulemakings and Review of Existing Regulations

Expiration of the “GSE Patch”

In January 2019, the Bureau completed an assessment of certain rules that require mortgage lenders to make a reasonable and good faith determination that consumers have a reasonable ability to repay certain mortgage loans and that define certain “qualified mortgages” that a lender may presume comply with the statutory ability-to-repay requirement. The “GSE Patch” is set to expire in January 2021, meaning that loans eligible to be purchased or guaranteed by GSEs that are originated after that date would not be eligible for qualified mortgage status under its criteria. In July 2019, the Bureau issued an ANPR to amend Regulation Z, regarding the scheduled expiration of the GSE Patch, and is currently reviewing the comments it received since the comment period closed on September 2019.

As noted in a previous blog post, the CFPB announced in its ANPR, that the Bureau does not intend to extend the GSE patch permanently. It will be interesting to see whether the Bureau will allow the patch to expire in January 2021 as planned of if the Bureau will use this as an opportunity to possibly extend the expiration date.

Addition of New Regulatory Agenda Items

In response to feedback received in response to the Bureau’s 2018 Call for Evidence and other outreach efforts, the Bureau is adding two new items to its long-term regulatory agenda to address concerns related to (i) loan originator compensation; and (ii) the use of electronic channels of communication in the origination and servicing of credit card accounts.

Review of Existing Regulations

The Rulemaking Agenda also highlights the Bureau’s active review of existing regulations.  For example, the CFPB will be assessing its so-called TRID Rule pursuant to Section 1022(d) of the Dodd-Frank Act, which requires the CFPB to publish a report assessing the effectiveness of each “significant rule or order” within five years of it taking effect.  The Bureau must issue a report with the results of its assessment by October 2020.

The Rulemaking Agenda further notes that, in 2020, the Bureau expects to conduct a 610 RFA review of the Regulation Z rules that implemented the Credit Card Accountability Responsibility and Disclosure Act of 2009.  Section 610 of the RFA requires federal agencies to review each rule that has or will have a significant economic impact on a substantial number of small entities within 10 years of publication of the final rule.

Takeaway

The Bureau’s Rulemaking Agenda gives industry an advanced look at what to expect from the CFPB in the coming months. We expect the Bureau to be active in working through their agenda and will provide further updates as they become available.

* We would like to thank Associate, David McGee, for his contributions to this blog post.

Federal Court Inspects Maryland’s Restrictions on Inspection Fees

By ,

A&B Abstract:

Maryland’s inspection fee statute has been interpreted by the Maryland Court of Appeals and the Maryland Office of the Commissioner of Financial Regulation (“OCFR”) to apply both at the time of origination and throughout the servicing of a residential mortgage loan.  More recently, a lower federal district court decision came to a different interpretation.

Maryland’s Inspection Fee Restriction

Maryland Commercial Law Section 12-121 provides that, subject to limited exceptions, a lender may not impose a “lender’s inspection fee” in connection with a loan secured by residential real property.   A “lender’s inspection fee” means a fee imposed by a lender to pay for a visual inspection of real property. A lender’s inspection fee may be charged only if the inspection is needed to ascertain the completion of (i) the construction of a new home; or (ii) repairs, alternations, or other work required by the lender.  A “lender” is defined as a licensee or a person who makes a loan subject to Maryland’s Interest and Usury subtitle. In turn, a “licensee” is defined as a person that is required to be licensed to make loans subject to Maryland’s Interest and Usury subtitle, regardless of whether the person is actually licensed.

Prior Guidance

Previously, the Court of Appeals of Maryland held, in Taylor v. Friedman, 689 A.2d 59 (Md. Ct. App. 1997), that, unless permitted by Section 12-121(c), the prohibition on inspection fees was not limited to inspections for closings, but extended to any inspections throughout the life of the loan. In 2014, the OCFR released an advisory opinion stating that Taylor remains good law in Maryland and applies to circumstances where a servicer orders a visual inspection of property following default on the terms of the mortgage.

Roos vs. Seterus

More recently, the U.S. District Court for the District of Maryland in Roos v. Seterus held, despite previous decisions indicating otherwise, that non-lenders may charge inspection fees to mortgagors.  The defendants in Roos argued that they did not charge illegal inspection fees because (1) the deed of trust specifically authorized inspection fees; (2) Section 12-121 is inapplicable to the defendants; and (3) Section 12-121 does not have a blanket prohibition on the imposition of inspection fees. The defendants believed that since they were a servicer, and the plain language of the statute only prohibited lenders from charging inspection fees, the statute did not prohibit them from charging inspection fees.  The court agreed with defendants that the plain meaning of the statute only prohibits a “lender” from imposing or collecting inspection fees. Although the court in Roos did not itself provide a definition of “lender,” the court pointed to a Montgomery Circuit Court case, Kemp v. Seterus, Inc., No. 441428-V, 2018 Md. Cir. Ct. LEXIS 9 (Md. Cir. Ct. Oct. 19, 2018), which addressed the issue. In that case, the court stated that “the meaning of the statute [wa]s plain; only ‘persons’ which make loans to ‘borrowers’ are lenders and thus covered by the statute.” The court in Roos adopted the Kemp court’s definition of lender, finding it well reasoned and applicable since it involved the same issue and defendant.

Takeaway

It is unclear if this decision will convince the OCFR to change its long-standing position or if plaintiffs will appeal this decision.  Moreover, we note that this decision was issued by a federal district court interpreting Maryland state law and, as such, will not have precedential value in Maryland state courts. While defendants may have prevailed in this federal district court case, servicers should still remain cautious in charging inspection fees when servicing a loan secured by residential real estate in Maryland.

* We would like to thank Associate, David McGee, for his contributions to this blog post.

Maine Enacts Law Protecting Victims of Economic Abuse

By

A&B Abstract:  An Act to Provide Relief to Survivors of Economic Abuse (the “Economic Abuse Law”), effective September 19, 2019, is aimed at preventing “economic abuse” by providing certain protections to victims of such abuse, in part, by imposing additional obligations on debt collectors and consumer reporting agencies (“CRAs”).  Debt collectors and CRAs should carefully review the Economic Abuse Law and determine whether updates to their policies, procedures and controls are necessary to ensure compliance with these additional protections.

What does the Economic Abuse Law do?

The Economic Abuse Law attempts to help victims of so-called “economic abuse” by (i) amending the Maine Fair Debt Collection Practices Act (“MFDCPA”) to provide certain protections from debt collection for survivors of economic abuse, (ii) amending the Maine Fair Credit Reporting Act (“MFCRA”) to require credit reporting agencies to remove from a consumer’s credit report any debt that is determined to be the result of economic abuse, and (iii) authorizing the courts to order compensation for losses resulting from economic abuse.

What is “economic abuse”?

Under the Economic Abuse Law, “economic abuse” means causing or attempting to cause an individual to be financially dependent by maintaining control over the individual’s financial resources.  The definition also includes the following non-exhaustive list of certain types of economic abuse:

  • unauthorized use of credit or property,
  • withholding access to money or credit cards,
  • forbidding attendance at school or employment,
  • stealing from or defrauding of money or assets,
  • exploiting the individual’s resources for personal gain of the defendant, or
  • withholding physical resources such as food, clothing, necessary medications or shelter.

See 19-A M.R.S. § 4002(3-B).  The Economic Abuse Law’s legislative history clarifies that the definition of “economic abuse” “is not intended to address identity theft, which is covered by the federal Fair Credit Reporting Act . . . Instead, the amendment includes, but is not limited to, the exploitative use of joint credit accounts without authorization by both joint owners and debt incurred through coercion.”

What protections does the Economic Abuse Law provide?

Additional Protections Under the MFDCPA

Under the existing provisions of the MFDCPA, if a consumer notifies a debt collector in writing within 30 days of receiving a debt validation notice, that the debt, or any portion of the debt, is disputed or that the consumer requests the name and address of the original creditor, the debt collector must cease collection of the debt or any disputed portion of the debt, until the debt collector obtains verification of the debt or a copy of the judgment, or the name and address of the original creditor, and a copy of the verification or judgment, or name and address of the original creditor, is mailed to the consumer by the debt collector.  32 M.R.S. § 11014(2).

The Economic Abuse Law amends the MFDCPA to also require that a debt collector cease collection of a debt or any disputed portion of a debt owed by a consumer subjected to economic abuse, “[i]f the consumer provides documentation to the debt collector as set forth in [14 M.R.S. § 6001(6)] that the debt or any portion of the debt is the result of economic abuse.”  Under 14 M.R.S. § 6001(6), acceptable documentation includes (1) a statement signed by a Maine-based sexual assault counselor, an advocate, or a victim witness advocate, (2) a statement signed by a health care provider, mental health care provider or law enforcement officer, or (3) a copy of a (i) protection from abuse (or harassment) complaint or a temporary order or final order of protection, (ii) police report prepared in response to an investigation of an incident of domestic violence, sexual assault or stalking, or (iii) criminal complaint, indictment or conviction for a domestic violence, sexual assault or stalking charge.

Unlike the existing protections discussed above, this new provision could be read to impose an absolute bar to the collection of debt resulting from economic abuse, as it is unclear whether there could be circumstances under which a debt collector may resume collection of such debt.  For example, one piece of acceptable documentation that a victim may provide under 14 M.R.S. § 6001(6) is a “copy of a protection from abuse complaint or a temporary or final order of protection.”  To the extent that a debt collector relies on a complaint or temporary order of protection that a court ultimately dismisses, it is unclear whether, and if so how, a debt collector could resume collection of such debt.

Additional Protections Under the MFCRA 

The MFCRA requires that, if a consumer disputes any item of information contained in a consumer’s credit report on the grounds that it is inaccurate and the dispute is directly conveyed to the consumer reporting agency (“CRA”) by the consumer, the CRA must reinvestigate and record the current status of the information within 21 calendar days of notification of the dispute, unless the dispute is frivolous.  10 M.R.S. § 1310-H(2).

The Economic Abuse Law would provide additional protections for victims of economic abuse.  Specifically, if a consumer provides documentation to a CRA as set forth in 14 M.R.S. § 6001(6) that the debt or any portion of the debt is the result of economic abuse, the CRA must reinvestigate the debt and, if it is determined that the debt is the result of economic abuse, the CRA must remove from the consumer’s credit report any reference to the debt or any portion of the debt determined to be the result of economic abuse.  10 M.R.S. § 1310-H(2-A).

Compensation for Victims of Economic Abuse 

In addition to the foregoing, the Economic Abuse Law also amends Maine’s Protection from Abuse Chapter to expressly empower the courts to provide monetary compensation to victims of economic abuse.  Specifically, courts are expressly authorized to “enter a finding of economic abuse” and “[o]rder payment of monetary relief to the plaintiff for losses suffered as a result of the defendant’s conduct.”  See 19-A M.R.S. § 4007(1).  The legislative history clarifies that the [Economic Abuse Law] does not add economic abuse as a type of conduct for which a protection from abuse order may be sought, although it does provide that if a protection from abuse order is issued, the court has expanded discretion to order appropriate monetary relief to help address the impact of any economic abuse that may be found by the court.”

Takeaway

As Maine regulators gear up to implement and enforce the additional protections provided by the Economic Abuse Law, debt collectors and CRAs should carefully review and update their policies, procedures and controls to ensure compliance with these additional protections.

A Closer Look at the CFPB’s Proposed Debt Collection Rules – Part Four: Other Conduct Provisions

By

A&B Abstract

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

In part one of this series, we provided a brief overview of the FDCPA and the Proposed Rule’s most impactful provisions.  In part two, we summarized the key provisions of the Proposed Rule relating to debt collector communications with consumers.  In part three, we summarized the key provisions of the Proposed Rule relating to debt collectors’ disclosures to consumers.  This post summarizes certain additional conduct provisions under the Proposed Rule.  These include provisions relating to decedent debt, the collection of time-barred debt, credit reporting restrictions, and restrictions on a debt collector’s ability to transfer, sell, or place a debt for collection.

Proposed Provisions Related to Decedent Debt

The FDCPA defines a “consumer” as any natural person obligated or allegedly obligated to pay any debt.  Under the Proposed Rule, this definition would be revised to make clear that a “consumer” includes any natural person, whether living or deceased, obligated or allegedly obligated to pay any debt.  In addition, for purposes of the Proposed Rule’s provisions regarding communications in connection with debt collection (proposed section 1006.6) and the prohibition on communicating through a medium of communication that the consumer has requested the debt collector not use (proposed section 1006.14(h)), proposed section 1006.6(a)(5) would interpret FDCPA section 805(d)’s definition of the term consumer to include:

  1. The consumer’s spouse;
  2. The consumer’s parent, if the consumer is a minor;
  3. The consumer’s legal guardian;
  4. The executor or administrator of the consumer’s estate, if the consumer is deceased; and
  5. A confirmed successor in interest, as defined in Regulation X, 12 CFR 1024.31, and Regulation Z, 12 CFR 1026.2(a)(27)(ii).

Under Regulations X and Z, a successor in interest is a person to whom a borrower transfers an ownership interest either in a property securing a mortgage loan subject to subpart C of Regulation X, or in a dwelling securing a closed-end consumer credit transaction under Regulation Z, provided that the transfer is:

  1. A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
  2. A transfer to a relative resulting from the death of a borrower;
  3. A transfer where the spouse or children of the borrower become an owner of the property;
  4. A transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property; or
  5. A transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.

A confirmed successor in interest, in turn, means a successor in interest whose identity, and ownership interest in the relevant property type, have been confirmed by the servicer of the loan.

The Bureau has previously explained that the word “includes” in FDCPA section 805(d) indicates that section 805(d) is an exemplary, rather than an exhaustive, list of the categories of individuals who are consumers for purposes of that section. The Bureau has further explained that, “given their relationship to the individual who owes or allegedly owes the debt, confirmed successors in interest are—like the narrow categories of persons enumerated in FDCPA section 805(d)—the type of individuals with whom a debt collector needs to communicate about the debt.”  The Bureau is seeking comment on the proposed definition of “consumer” under section 1006.6(a)(5), including on the benefits and risks of communications about debts between debt collectors and confirmed successors in interest.

In addition, proposed comment 6(a)(4) would clarify that the terms “executor or administrator” also include the personal representative of the consumer’s estate.  The proposed commentary would explain that a personal representative is any person who is authorized to act on behalf of the deceased consumer’s estate.  Persons with such authority may include personal representatives under the informal probate and summary administration procedures of many states, persons appointed as universal successors, persons who sign declarations or affidavits to effectuate the transfer of estate assets, and persons who dispose of the deceased consumer’s assets extrajudicially.

The proposed comment would adapt the general description of the term personal representative from Regulation Z, 12 CFR 1026.11(c), comment 11(c)-1 (persons “authorized to act on behalf of the estate”) rather than the general description found in the Federal Trade Commission’s (“FTC”) Policy Statement on Decedent Debt (persons with the “authority to pay the decedent’s debts from the assets of the decedent’s estate.”). The Bureau has indicated that it believes this change is non-substantive. The Bureau is requesting comment on the scope of the definition of personal representative in proposed comment 6(a)(4)-1 and on any ambiguity in the illustrative descriptions of personal representatives.  Interested stakeholders should consider the potential operational challenges associated with validating and documenting whether a person is in fact the personal representative of a deceased consumer’s estate, given that disclosure regarding a consumer’s debt to the wrong person could result in a prohibited third-party disclosure.  Thus, debt collectors and other industry stakeholders should determine whether additional guidance from the Bureau is needed.

In addition, we note proposed section 1006.18’s general prohibition against false, deceptive, or misleading representations, which the Bureau has indicated would apply to express or implied misrepresentations that a personal representative is liable for the deceased consumer’s debts.  The Bureau is requesting comment on whether the general prohibition against false, deceptive, or misleading representations in proposed section 1006.18 is sufficient to protect individuals who communicate with debt collectors about a deceased consumer’s debts, or whether affirmative disclosures in the decedent debt context are needed.

Proposed Provisions Regulating the Collection of Time-Barred Debts

Under current law, multiple courts have held that suits and threats of suit on time-barred debt violate the FDCPA, reasoning that such practices violate FDCPA section 807’s prohibition on false or misleading representations, FDCPA section 808’s prohibition on unfair practices, or both.  The FTC has similarly concluded that the FDCPA bars actual and threatened suits on time-barred debt.

Nevertheless, the Bureau has indicated that its enforcement experience suggests that some debt collectors may continue to sue or threaten to sue on time-barred debts.  Furthermore, in response to its Advanced Notice of Proposed Rulemaking, issued in November 2013, the Bureau indicated that some consumer advocacy groups and State Attorneys General observed that consumers are often uncertain about their rights concerning time-barred debt and that those observations have been borne out by the Bureau’s own consumer testing.

Consequently, the Proposed Rule would interpret FDCPA section 807 to provide that a debt collector must not bring or threaten to bring a legal action against a consumer to collect a debt that the debt collector “knows or should know” is a time-barred debt because such suits and threats of suit explicitly or implicitly misrepresent, and may cause consumers to believe, that the debts are legally enforceable. The Bureau has indicated that the Proposed Rule “may provide debt collectors with greater certainty as to what the law prohibits while also protecting consumers and enabling them to prove legal violations without having to litigate in each case whether lawsuits and threats of lawsuits on time-barred debt violate the FDCPA.”  However, it is unclear how the “knows or should know” standard will be applied.  The Bureau appears to have acknowledged as much, indicating that “sometimes [it] may be difficult…to determine whether a ‘know or should have known’ standard has been met” and that “[s]uch uncertainty could increase litigation costs and make enforcement of proposed section 1006.26(b) more difficult.”  Therefore, the Bureau has specifically requested comment on using a “knows or should know” standard in proposed section 1006.26(b) as well as on the advantages of using a strict liability standard in its place.

While it is notable that the Bureau did not take the additional step of prohibiting the collection of time-barred debt in a non-judicial setting, it has indicated that it is “likely to propose that debt collectors must provide disclosures to consumers when collecting time-barred debts.” The Bureau has indicated that it is currently completing its evaluation of “whether consumers take away from non-litigation collection efforts that they can or may be sued on a debt and, if so, whether that take-away changes depending on the age of the debt.” The Bureau is also evaluating how a time-barred debt disclosure might affect consumers’ understanding of whether debts can be revived. Specifically, the Bureau is considering disclosures that would inform a consumer that, because of the age of the debt, the debt collector cannot sue to recover it, and would also include, where applicable, a disclosure that would inform a consumer that the right to sue on a time-barred debt can be revived in certain circumstances.

The Bureau has indicated that it plans to conduct additional consumer testing of possible time-barred debt and revival disclosures to further inform its evaluation of any time-barred debt disclosures. The Bureau intends to issue a report on such testing and any disclosure proposals related to the collection of time-barred debt and will provide stakeholders with an opportunity to comment on such testing if the Bureau does in fact intend to use it to support disclosure requirements in a final rule.

Proposed Restrictions on Credit Reporting

The Bureau noted that some debt collectors engage in so-called “passive” collections by furnishing information to consumer reporting agencies without first communicating with consumers.  Accordingly, in order to mitigate the perceived harm that a consumer may suffer if a debt collector furnishes information to a consumer reporting agency without first communicating with the consumer, proposed section 1006.30(a) would prohibit a debt collector from furnishing information regarding a debt to a consumer reporting agency before communicating with the consumer about the debt.

In addition, the Bureau noted that during the Small Business Regulatory Enforcement Fairness Act (“SBREFA”) process, industry stakeholders expressed concern over the potential burden associated with documenting, such as by using certified mail, that a consumer received a communication and recommended that the Bureau consider clarifying the type of communication that would be sufficient to satisfy the requirement, including clarifying that debt collectors do not need to send the validation notice by certified mail.

To address the recommendation that came out of the SBREFA process, the Bureau is proposing comment 30(a)-1.  In particular, proposed comment 30(a)-1 would clarify that a debt collector would satisfy proposed section 1006.30(a)’s requirement to communicate if the debt collector conveyed information regarding a debt directly or indirectly to the consumer through any medium, but a debt collector would not satisfy the communication requirement if the debt collector attempted to communicate with the consumer but no communication occurred.  By way of example, a debt collector would be considered to have communicated with the consumer if the debt collector provides a validation notice to the consumer, but a debt collector would not be considered to have communicated with the consumer by leaving a limited-content message for the consumer.

The Bureau is seeking comment on proposed section 1006.30(a) and its related commentary.  In light of the record retention requirements that would be imposed under the Proposed Rule—which would require a debt collector to retain evidence of compliance with the Proposed Rule for three years—debt collectors and other industry stakeholders should consider whether additional guidance is needed regarding the level of documentation or other evidence of compliance needed to satisfy proposed section 1006.30(a) and the record retention requirements under proposed section 1006.100.

Proposed Provisions Governing Transfers of Debt

In promulgating the Proposed Rule, the Bureau noted that the “sale, transfer, and placement for collection of debts that have been paid or settled or discharged in bankruptcy, or that are subject to an identity report creates risk of consumer harm.”  Specifically, if a debt is paid or settled, or discharged in bankruptcy, the debt is either extinguished or uncollectible, and if a debt is listed on an identity theft report, the debt likely resulted from fraud, in which case the consumer may not have a legal obligation to repay it.

The Bureau has noted that when the FDCPA became law, debt sales and related transfers were uncommon. However, in more recent years, debt sales and transfers have become more frequent. As a result, the Bureau has noted that the “general growth in debt sales and transfers may have increased the likelihood that a debt that has been paid, settled, or discharged in bankruptcy may be transferred or sold.”  Additionally, identity theft may increase the number of debts that are created if consumers’ identities are stolen and their personal information is misused.

To address these perceived risks, proposed section 1006.30(b)(1)(i) generally would prohibit a debt collector from selling, transferring, or placing for collection a debt if the debt collector “knows or should know” that the debt has been paid or settled, discharged in bankruptcy, or that an identity theft report has been filed with respect to the debt.

Moreover, with respect to a debt collector that is collecting a consumer financial product or service debt, proposed section 1006.30(b)(ii) would identify as an unfair act or practice under Dodd-Frank the sale, transfer, or placement for collection of such debt.

The Proposed Rule would provide an exemption from this general prohibition for transfers made to the debt’s owner.  The Bureau is also proposing the following three additional exemptions that parallel the exemptions found in the Fair Credit Reporting Act, including:

  1. Transferring the debt to a previous owner of the debt if transfer is authorized under the terms of the original contract between the debt collector and the previous owner;
  2. Securitizing the debt or pledging a portfolio of such debt as collateral in connection with a borrowing; or
  3. Transferring the debt as a result of a merger, acquisition, purchase and assumption transaction, or transfer of substantially all of the debt collector’s assets.

The Bureau is seeking comment on several issues related to this proposal, including:

  • On whether additional categories of debt, such as debt currently subject to litigation and debt lacking clear evidence of ownership, should be included in any prohibition adopted in a final rule;
  • On how frequently consumers identify a specific debt when filing an identity theft report, and on how frequently debt collectors learn that an identity theft report was filed in error and proceed to sell or transfer the debt;
  • On any potential disruptions that proposed section 1006.30(b)(1)(i) would cause for secured debts, such as by preventing servicing transfers or foreclosure activity related to mortgage loans; and
  • On whether any of the currently proposed categories of debts should be clarified and, if so, how; and on whether additional clarification is needed regarding the proposed “know or should know” standard.

Takeaway

While the Bureau appears to be cognizant of the potential compliance issues associated with several of the aforementioned provisions of the Proposed Rule, it is unclear how the “knows or should know” standard will be interpreted and enforced or whether the standard will result in more litigation than otherwise anticipated.  Accordingly, debt collectors and other industry stakeholders should consider commenting on these and other provisions of the Proposed Rule.