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A Closer Look at the CFPB’s Proposed Debt Collection Rules – Part Five: The Devil is in the Details, Purgatory is what is Left Unsaid

A&B Abstract

This blog post is part five 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.

The idiom “the devil is in the details” refers to catching something hidden in the details. At 538 pages, there is a lot to catch.  The prior four blog posts described the requirements of the Proposed Rule.  In part one, 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.  In part four, we discussed certain additional conduct provisions under the Proposed Rule, such as 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.  This post examines noteworthy issues that the Proposed Rule does not address, such as:

  • Clarification of the definition of “debt collector” under the FDCPA and the scope of certain exemptions from that definition
  • Implications for first party collectors
  • Ability to pass through actual third-party convenience fees
  • Implications of phone recordings, in light of the Proposed Rule’s record retention requirements
  • Interplay with state debt collection laws

Clarification of the Definition of, and Exemptions from, the Term “Debt Collector”

The purpose of the Proposed Rule is to prescribe Federal rules governing the activities of debt collectors, as that term is defined in the FDCPA.  A debt collector under the FDCPA is any person: (i) “who uses instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts” (the “principal purpose” prong), or (ii) “who regularly collects, or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due to another” (the “regularly collects” prong). The FDCPA also includes several exclusions from this definition.  Other than specifying that the term “debt collector” excludes certain private entities that operate certain bad check enforcement programs, the Proposed Rule restates the statutory definition of “debt collector” without addressing certain key issues that have been subject to uncertainty for far too long.  By way of example:

  • Who is a debt buyer and are all purchasers of loans or servicing rights debt collectors?   In the case of Henson v. Santander Consumer USA, the Supreme Court recently examined whether someone who purchased a whole loan while it was already in default would be considered a debt collector. The Court concluded that such an entity would not be a debt collector because the debt would not be “owed” to another.  The Court explicitly avoided ruling on whether such an entity that purchases defaulted debt could meet the principal purpose prong of the definition of debt collector.  As a result, questions remain on the application of the definition of debt collector to debt buyers.  Equally unclear is the application of this definition to servicers and subservicers who do not own the whole loan but service the loan for another entity.  While the Proposed Rule does not address such important issues, the preamble notes “[c]onsistent with the Court’s holding in Henson, the proposed definition thus could include a debt buyer collecting debts that it purchased and owned, if the debt buyer either met the ‘principal purpose’ prong of the definition or regularly collected or attempted to collect debts owed by others, in addition to collecting debts that it purchased and owned.”
  • Meaning of “in default.”  Under the FDCPA, the term debt collector excludes “any person collecting or attempting to collect any debt owed or due, or asserted to be owed or due to another, to the extent such debt collection activity . . . concerns a debt that was not in default at the time such person obtained it.”  The important phrase “in default” is not defined under the FDCPA. An influential FTC staff opinion letter from 2002 opined that whether a debt is “in default” is generally controlled by the terms of the contract creating the debt and applicable state and federal law but “in the absence of a contractual definition or conclusive state or federal law, a creditor’s reasonable written guidelines may be used to determine when an account is “in default.” In the context of mortgage servicing, the CFPB recognized in the preamble to its mortgage servicing rules that servicers may distinguish loans that are delinquent from loans in default (“[s]ervicers may use different definitions of ‘delinquency’ for operational purposes.  Servicers may also use different or additional terminology when referring borrowers who are late or behind on their payments – for example, servicers may refer to borrowers as “past due” or “in default” and may distinguish between borrowers who are “delinquent and seriously delinquent”).  It is not clear why the Bureau declined to clarify a key term such as “in default” in the Proposed Rule.
  • Scope of “de facto employee.”  The FDCPA also excludes from the definition of the term debt collector “any officer or employee of a creditor while, in the name of the creditor, collecting debts for such creditor.”  That influential 2002 FTC staff opinion letter opined the de facto employee exemption is limited to “those collection agency employees who are treated essentially the same as creditor employees. . .Whether the agency employees – working on the creditor’s premises or on the agency’s premises – are treated enough like creditor employees to become de facto employees of the creditor will depend on the degree of control and supervision exercised by the creditor over the agency employees’ collection activity, and how similar that control and supervision is to that exercised by the creditor over its own employees.”  Twice the CFPB has referred to this FTC staff opinion letter.  It is, thus, unclear why the CFPB does not address this known issue.

First Party Collectors

The Dodd-Frank Act amended the FDCPA to provide the Bureau with substantial rulemaking authority “with respect to the collection of debts by debt collectors.”  This is the primary authority upon which the Bureau has promulgated the Proposed Rule.  In addition, the Dodd-Frank Act provides the Bureau with the authority to prescribe rules applicable to prevent unfair, deceptive or abusive acts or practices (“UDAAP”) by “covered persons”.  “Covered persons” includes persons who are engaging in offering or providing a consumer financial product or service.  As noted in the preamble to Regulation F, “[c]overed persons under the Dodd-Frank Act thus include many FDCPA-covered debt collectors, as well as many creditors and their servicers who are collecting debt related to a consumer financial product or service.”  Several requirements in the Proposed Rule are promulgated under the Bureau’s UDAAP authority.  By way of example, with respect to a debt collector who is collecting a consumer financial product or service debt, Proposed Rule 1006.14 provides that it is an unfair act or practice place telephone calls or engage any person in telephone conversations repeatedly or continuously in connection with the collection of such debt, such that the natural consequence is to harass, oppress or abuse any person at the called number.  The Bureau proposes to set the frequency limit at 7 telephone calls within 7 consecutive days to a particular person about a particular debt.  The CFPB believes that such a limit bears a reasonable relationship to prevent an unfair practice. Would telephone calls in excess of the 7 calls within 7 consecutive day limit constitute an unfair act or practice if engaged in by persons other than FDCPA-debt collectors?  The Bureau, unfortunately, declined to say, thus leaving open the question of what, if anything, in the Proposed Rule could be relevant to first party creditors and their servicers.

Convenience Fees

There has been an uptick in consumer class actions following the CFPB’s guidance on Pay by Phone Fees (Compliance Bulletin 2017-01).  Both the FDCPA and the Proposed Rule provide that a debt collector cannot use unfair or unconscionable means to collect or attempt to collect any debt including the collecting of any amount unless such amount is expressly authorized by the agreement creating the debt or permitted by law. It is unfortunate that the CFPB elected not to provide clarification on the application of this restriction to convenience fees, as intimated in its Small Business Regulatory Enforcement Fairness Act (“SBREFA”) report.  That report notes that the CFPB considered two potential clarifications.  First, consistent with Compliance Bulleting 2017-01, the Bureau considered providing that incidental fees, including payment method convenience fees would be permissible only if: (a) state law expressly permits them, or (b) the customer expressly agreed to them in the contract that created the underlying debt and state law neither expressly permits nor prohibits the fee,  The Bureau further considered clarifying that fees charged in full by, and paid directly to, a third party payment processor, would not be collected directly or indirectly by the collector and would not be covered by the rule.  It is not clear why such clarifications did not make it into the Proposed Rule.

Record Retention

Proposed 1006.100 requires a debt collector to retain evidence of compliance with the Proposed Rule starting on the date that the debt collector begins collection activity on a debt and extending until three years after (i) the debt collector’s last communication or attempted communication in connection with the collection of the debt, or (ii) the debt is settled, discharged, or transferred to the debt owner or another debt collector.  The commentary to the Proposed Rule provides that debt collectors are not required to record telephone calls.  However, a debt collector must retain recordings if the recordings are “evidence of compliance.”  Does this mean that collectors who record phone calls for a short period of time for quality control purposes would now be required to maintain such recordings for the 3-year record retention period?  Moreover, what else is required to maintain “evidence of compliance”? Would it encompass all records the debt collector relied upon for the information in the validation notice and to support claims of indebtedness, such as the information the debt collector obtained before beginning to collect and the records the debt collector relied upon in responding to a dispute?  Would it encompass all records related to the debt collector’s interactions with the consumer, such as written and oral communications to and from the consumer, individual collection notes or communications in litigation?

State Debt Collection Laws

Mirroring the FDCPA, proposed section 1006.104 provides that “[n]either the [FDCPA] nor the corresponding provisions of this part annul, alter, affect, or exempt any person subject to the provisions of the [FDCPA] or the corresponding provisions of this part from complying with the laws of any state with respect to debt collection practices, except to the extent that those laws are inconsistent with any provisions of the [FDCPA] or the corresponding provisions of this part, and then only to the extent of the inconsistency.”  Moreover, the Proposed Rule provides that a State law is not inconsistent if the protection such law affords any consumer is greater than the protection provided by the FDCPA or the Proposed Rule.

State debt collection laws vary.  Approximately 30 states mandate licensure or registration of collection agencies and impose practice restrictions.  Three states impose more minimal notification requirements before operating as a collection agency.  Five states have no licensing/notification requirements but impose practice requirements.  Thirteen states require neither licensure or notification requirements nor impose agency-specific practice restrictions.  Three municipalities also have collection agency laws.  Some of these laws apply to debts not covered by the FDCPA such as original creditor debts or loans acquired when current that subsequently go into default.  States may have more extensive disclosure requirements or restrictive communication requirements.

One of the stated purposes of the FDCPA is to promote consistent action to protect consumers against debt collection abuses.  This, apparently, does not include consistent regulation of debt collectors, as it appears that so long as it isn’t inconsistent, state regulation above and beyond the FDCPA is acceptable.


The Proposed Rule reflects the investment of significant time and consideration by the Bureau and an attempt to address some of the most significant issues facing the debt collection industry as it adapts to modern collection practices.  However, a number of important issues remain unresolved.  As a result, debt collectors and other industry stakeholders must pay close attention both to what is in the Proposed Rule and what is not.

Nevada Adopts Regulations for Licensure by Endorsement

A&B Abstract:

Nevada recently adopted new regulations allow a natural person to obtain a license by endorsement to engage in business as a mortgage broker or mortgage agent, mortgage loan servicer, or escrow agent or agency, so long as such person holds a corresponding valid and unrestricted license to engage in such business in another jurisdiction upon meeting certain conditions.

New Regulations:

On June 26, 2019, the Nevada Commissioner of Mortgage Lending (“Commissioner”) adopted new regulations R177-18, R178-18 and R180-18, which introduce standards that permit the issuance of licenses by endorsement for natural persons to engage in business as: (1) a mortgage broker or mortgage agent; (2) a mortgage servicer or a covered service provider (including a foreclosure and loan modification consultant); and (3) an escrow agent or agency, respectively.

Eligibility Criteria:

In order to be eligible for a license by endorsement, a natural person must:

  • hold a corresponding valid and unrestricted license to engage in the relevant occupation or profession in another jurisdiction;
  • submit proof to the Commissioner of his or her corresponding valid and unrestricted license in another jurisdiction; and
  • possess qualifications that are largely similar to the qualifications required for a Nevada license,

in addition to meeting other qualifications set forth in the new regulations.

Other Changes to Licensing Requirements:

The amendments also modify existing licensing requirements for mortgage brokers, mortgage bankers and mortgage agents by:

  • Authorizing the Commissioner to waive any monthly reporting requirements under Nevada law if substantially similar information is available from another source; and
  • Reducing the annual continuing education required to be completed by a mortgage broker or mortgage agent.

New Jersey Joins Other States Regulating Student Loan Servicers

A&B Abstract

New Jersey recently enacted its own version of a Student Loan Bill of Rights, which requires the licensing of any person acting “directly or indirectly” as a student loan servicer. In light of the growing number of states enacting similar language to regulate the student loan industry, what might this mean for the future for passive, secondary market investors in student loan debt?


On July 30, 2019, acting New Jersey Governor Sheila Oliver signed into law Senate Bill 1149 (2019 N.J. Laws 200), New Jersey’s “Student Loan Bill of Rights.” Following suit with other states regulating student loan servicers, this legislative measure aims to protect student loan borrowers and imposes a new licensing obligation on “student loan servicer[s]” in the state.

Effective November 27, 2019 (120 days after enactment), SB 1149 prohibits any person from “act[ing] as a student loan servicer, directly or indirectly, without first obtaining a license” from the Department of Banking and Insurance (“DOBI”).  The measure also creates the office of a student loan ombudsman.

SB 1149 bears many similarities to the efforts of other states (including Maine and Maryland) to regulate the student loan servicing industry. Like the regulators in other states, DOBI has not yet released formal guidance regarding the applicability of SB 1149’s licensing obligations to passive, secondary market investors in New Jersey student loan debt.  However, the language of the new law appears to be broad enough to allow DOBI to regulate such persons upon a recommendation from the student loan ombudsman.  It also raises the question of whether DOBI will require such investors to be licensed or registered to invest in New Jersey student education loans.

Responsibilities of the Student Loan Ombudsman

Effective November 27, 2019, the measure requires Commissioner of DOBI to designate an “Ombudsman.” The Ombudsman’s responsibilities are to:

  • Receive, review, and attempt to resolve any complaints from student loan borrowers, including, but not limited to, attempts to resolve those complains in collaboration with institutions of higher education, student loan servicers, and any other participants in student education loan lending;
  • Compile and analyze data on student loan borrower complaints as further described in the amended laws;
  • Assist student loan borrowers to understand their rights and responsibilities under the terms of student education loans;
  • Provide information to the public, agencies, legislators, and others regarding the problems and concerns of student loan borrowers and make recommendations for resolving those problems and concerns;
  • Analyze and monitor the development and implementation of federal, State, and local laws, regulations, and policies relating to student loan borrowers and recommend any changes the student loan ombudsman deems necessary;
  • Review the complete student education loan history for any student loan borrower who ahs provided written consent for review;
  • Disseminate information concerning the availability of the student loan ombudsman to assist student loan borrowers and potential student loan borrowers, including disseminating the information to institutions of higher education, student loan servicers, and any other participant in student education loan lending, with any student loan servicing concerns; and
  • Take any other actions necessary to fulfill the duties of the student loan ombudsman as set forth in the amended laws.

Moreover, the Ombudsman must report to the Commissioner of DOBI and the Secretary of Higher Education on the statute’s implementation, the overall effectiveness of the student loan ombudsman position, and any additional steps that need to be taken for DOBI to gain regulatory control over the licensing and enforcement of student loan servicers.

SB 1149 grants the Ombudsman broad authority to regulate New Jersey’s student loan industry, particularly with respect to those that are deemed to “service” New Jersey student education loans. With respect to the bolded language above, it appears that the Ombudsman has the authority to recommend changes to New Jersey’s regulation of such persons, including recommending that passive, secondary market investors in New Jersey student education loans be licensed as New Jersey Student Loan Servicers, which is further supported by the new student loan servicer licensing requirements in SB 1149.

Licensing of Student Loan Servicers

SB 1149 provides that “[n]o person shall act as a student loan servicer, directly or indirectly, without first obtaining a license” from DOBI, unless specifically exempt. (Emphasis added.)  The term “student loan servicer” means “any person, wherever located, responsible for the servicing of any student education loan to any student loan borrower.” Similarly, “servicing” means:

  • receiving any scheduled periodic payments from a student loan borrower or notification of such payments, and applying payments to the borrower’s account pursuant to the terms of the student education loan or the contract governing the servicing of the loan;
  • during a period when no payment is required on the student education loan, maintaining account records for the loan and communicating with the student loan borrower regarding the loan, on behalf of the holder of the loan; or
  • interacting with a student loan borrower to facilitate the loan servicing as described in [the amended laws], including activities to help prevent loan default on obligations arising from a student education loan.

Importantly, the only entities exempt from licensing are: (1) a State or federally chartered bank, savings bank, savings and loan association, or credit union; (2) a wholly owned subsidiary of a bank or credit union; and (3) “any operating subsidiary where each owner of the operating subsidiary is wholly owned by the same bank or credit union.”

Potential Impact on Investors

The “directly or indirectly” language in the licensing obligation may raise concerns for entities that invest: (1) in student loan debt, or (2) in stand-alone master servicing rights in various types of debt.  Other state laws with similarly broad language have given state regulatory agencies the latitude to develop formal or informal policies to regulate passive, secondary market investors in that type of debt without the passage of new laws or regulations. For example, state mortgage regulators may utilize such language to regulate entities that passively invest in whole residential mortgage loans on a servicing-released basis or the stand-alone mortgage servicing rights (“MSRs”) in such loans. Such regulators use this language to impose state mortgage servicer licensing obligations on persons that passively invest in that type of debt, and they are able to do so without any further legislative or regulatory action.

Applying this logic to SB 1149, DOBI could require passive, secondary market investors in New Jersey student education loans to be licensed as New Jersey Student Loan Servicers without any further legislative or regulatory action.  SB 1149 provides that a “student loan servicer” includes a person “responsible” for the servicing of a student education loan; further, the licensing obligation extends to those “indirectly” acting as a student loan servicer.  Both provisions could be read to require licensure for persons that passively invest in New Jersey student education loans and hire appropriately-licensed or exempt third-party subservicers to handle the servicing of such loans and all borrower-facing interactions.

Expectations for Future Regulation of Investors in New Jersey Student Loan Debt

As noted above, neither DOBI nor the New Jersey legislature appears to have released any formal determination as to whether this licensing requirement applies to passive, secondary market investors in student loan debt.  However, a growing number of states are regulating the student loan industry amid growing fears that there is waning federal regulation and oversight of the industry under the Trump administration.  As a result, it would not be surprising to see the Ombudsman or the Commissioner of DOBI release such a determination.

We will continue to monitor the state’s efforts to regulate student loan servicers, particularly as they relate to passive, secondary market investors in New Jersey student loan debt, in the months to come.

North Carolina Enacts Servicemember Protections

A&B Abstract:

North Carolina is the latest state to extend the protections of the federal Servicemembers Civil Relief Act (“SCRA”), 50 U.S.C. §§ 3901 et seq., to active duty members of its National Guard.  What does the new law require?

North Carolina Servicemembers Civil Relief Act

On July 25, North Carolina Governor Roy Cooper signed into law the North Carolina Servicemembers Civil Relief Act, which extends the protections of the federal SCRA to North Carolina residents serving on active National Guard duty.  Although the statute generally mirrors federal law, a few distinctions are worth note.

Who is a Servicemember?

For purposes of the new law, a “servicemember” has the same meaning as under the federal SCRA.  The term also includes a member of the North Carolina National Guard (or a resident of North Carolina in another state’s National Guard) called to active duty by the governor for more than 30 consecutive days.  However, for the statute’s protections to apply, a member of the National Guard must provide the lender or servicer with a written or electronic copy of the order to military service no later than 30 days after the termination of such service.  As a result, some servicemembers must act affirmatively in order to receive the law’s protections.

The law also grants a dependent of a servicemember the same rights and protections as are provided to a servicemember under Subchapter II of the federal SCRA.  Thus, dependents are eligible for protection against default judgments, stays of proceedings, and restrictions on the maximum rate of interest an obligation may bear.

Who Can Enforce the Statute?

The new North Carolina law provides various enforcement mechanisms.  First, a violation of the federal SCRA is a violation of the North Carolina law.  Second, a violation of the North Carolina law is an unfair or deceptive trade practice for purposes of Chapter 75 of the North Carolina General Statutes.  Finally, either the North Carolina Attorney General or an aggrieved servicemember (through a private right of action) may bring an action to enforce the statute.

Rhode Island Requires Licensure for Virtual Currency Business Activity

A&B Abstract:

Effective January 1, 2020, Rhode Island will regulate virtual currency under its money transmission laws.


Forty-nine states and the District of Columbia regulate money transmission.  Almost all of those jurisdictions have different definitions and exemptions that determine whether their laws apply to certain businesses or activities. The result is a complex, patchwork regulatory landscape. Further complicating the issue is the question of whether virtual currency is considered money or monetary value for purposes of current state money transmitter laws.

States have started to answer this question. Through official guidance, regulatory agency opinion letters, and/or legislation, states are clarifying whether their laws apply to the sale, exchange or transfer of virtual currency.  On July 15, Rhode Island’s governor signed House Bill 5847, which clarifies that certain virtual currency business activities will be subject to the state’s money transmitter regime.  The measure also adds provisions to the current law related to currency transmissions and licensing requirements.

What Activity Is Regulated?

The bill generally requires a person engaging in “currency transmission” for a fee or other consideration to be licensed with the state. “Currency transmission” explicitly includes “maintaining control of virtual currency or transactions in virtual currency on behalf of others.” The bill provides several exemptions from licensure requirements, including for persons using virtual currency for personal, family or household purposes.

For purposes of the bill, virtual currency means “a digital representation of value that: (A)[i]s used as a medium of exchange, unit of account, or store of value; and (B) [i]s not legal tender, whether or not denominated in legal tender.” The definition excludes:

  • rewards or affinity program value that cannot be taken from or exchanged with the merchant for “legal tender, bank credit or virtual currency;”
  • digital representations of value used within online games;
  • “[n]ative digital token used in a proprietary blockchain service platform;” and
  • gift certificates, gift cards, and general-use prepaid cards.

The bill requires licensees engaging in virtual currency business activities to provide certain specified disclosures to residents.  Further, licensees must create and maintain certain compliance programs, including business continuity and disaster recovery programs, anti-fraud programs, anti money-laundering programs and information and operational security programs.