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CFPB Issues Policy Statement on Dodd-Frank “Abusiveness” Standard, But Important Uncertainties Remain

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A&B ABstract:

The Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) issued a Policy Statement to provide a framework for how it intends to apply the Dodd-Frank Act’s “abusiveness” standard going forward in its supervision and enforcement activities. While this framework attempts to provide clarity where the Dodd-Frank Act left uncertain what acts and practices would be considered “abusive,” the Policy Statement fails to address several key issues. In particular, the Policy Statement does not identify specific conduct that would be considered abusive—leaving public statements on such issues to enforcement matters and litigation.

Background to the Policy Statement

The Dodd-Frank Act (“the Act”) added a prohibition on “abusive” acts and practices to the established prohibition on unfair or deceptive acts and practices. Over the years, the Federal Trade Commission’s policy statements, enforcement actions, and judicial precedents have defined the prohibitions on “unfair” and “deceptive.” The abusiveness standard is less developed. The Act grants the CFPB authority to declare an act or practice as “abusive” if the act or practice: (1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) 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. This Policy Statement follows a symposium convened by the CFPB in 2019 where a panel of academics and regulatory and industry experts debated, among other issues, whether the CFPB should further define abusiveness.

Defining “Abusive” in Precedent

The CFPB and other agencies have seldomly alleged a standalone “abusive” claim; instead, such claims are generally paralleled by claims of “unfairness” and “deceptiveness.” When alleging abusive practices, the CFPB almost always alleged deceptive or unfair practices based on the same set of underlying facts. For example, in 2017 the CFPB alleged that a loan servicer routinely entered student loan borrowers into forbearance without adequately providing information to borrowers regarding possible income-based repayment plans. The CFPB argued that the servicer’s actions constituted both abusive practices and unfair practices under the Act, and the Court agreed.  While such decisions have provided some guidance on what constitutes an abusive practice under the Act, the courts, in reviewing such allegations, considered the statutory language but did not offer any guidance on what conduct might be construed as “abusive” but not construed as “unfair.”

The CFPB’s reticence to prosecute claims of abusive practices created a vacuum of interpretive guidance on how the abusiveness standard actually constrains businesses, beyond the black letter definition contained in the Act. For example, questions remained as to what act or practice would “materially interfere” with a consumer’s understanding of terms and conditions, or what exactly would constitute a financial service provider “taking unreasonable advantage” of a consumer seeking a product of service. These undefined terms left confusion and uncertainty for covered persons seeking to avoid violations. By contrast, the unfairness and deceptiveness standards (which were already in place before the Act’s introduction of an abusiveness standard) have been subject to decades of case law and agency interpretations, which have yielded clear guidance on what acts and practices are considered unfair or deceptive.

Content of the Policy Statement

The Policy Statement acknowledges that “[u]ncertainty remains as to the scope and meaning of abusiveness,” which “creates challenges for covered persons in complying with the law,” and it sets forth a framework regarding how the CFPB will enforce the abusiveness standard. It does not, however, describe or provide examples of precisely what conduct the CFPB would deem abusive.

The Policy Statement describes three categories of principles that the CFPB intends to apply to its supervision and enforcement actions.  The CFPB has stated that the principles reflect the standards it has applied in prior actions.

  1. Benefits vs. Harms: “The Bureau intends to focus on citing conduct as abusive in supervision and challenging conduct as abusive in enforcement if the Bureau concludes that the harms to consumers from the conduct outweigh its benefits to consumers (including its effects on access to credit).” The Policy Statement notes that incorporating this principle “not only ensures that the Bureau is committed to using its scarce resources to address conduct that harms consumers, but also ensures that the Bureau’s supervisory and enforcement decisions are consistent across matters.
  2. No Dual Pleadings: The Bureau intends to avoid “dual pleading” of abusiveness along with unfairness or deception violations which arise from all or nearly all the same facts, and alleging “stand alone” abusiveness violations that “demonstrate clearly the nexus between cited facts and the Bureau’s legal analysis.” The Bureau believes that this approach to pleading will “provide more certainty to covered persons as to the metes and bounds of conduct the Bureau determines is abusive” and “facilitate the development of a body of jurisprudence as to the conduct courts conclude is abusive.”
  3. “Good Faith” Limits on Monetary Relief: “[T]he Bureau generally does not intend to seek certain monetary remedies for abusive acts or practices if the covered person made a good-faith effort to comply with the law based on a reasonable—albeit mistaken—interpretation of the abusiveness standard. However, if a covered person makes a good-faith but unsuccessful effort to comply with the abusiveness standard, the Bureau still intends to seek legal or equitable remedies, such as damages and restitution, to redress identifiable consumer injury.”

The Policy Statement in Context

The Policy Statement is not a CFPB rulemaking. Rather, the Policy Statement merely “constitutes a general statement of policy that is exempt from the notice and comment rulemaking requirements of the Administrative Procedure Act” and is only “intended to provide information regarding the Bureau’s general plans to exercise its discretion.” It “does not impose any legal requirements on external parties, nor does it create or confer any substantive rights on external parties that could be enforceable in any administrative or civil Proceeding.” As such, while the Policy Statement is intended as a helpful guide to the Bureau’s enforcement philosophy with regard to the abusiveness standard, it is not law, and is subject to revision in the event of any change in the CFPB’s leadership, policies, or priorities.

The Policy Statement is not expected to affect ongoing litigation.  In remarks to the United States House of Representative Financial Oversight Committee on February 6, 2020, CFPB Director Kathleen Kraninger stated that “At this point, we have not amended any filings in court and don’t intend to related to this specifically,” indicating that the CFPB doesn’t anticipate repleading any of its pending court enforcement actions in light of the Policy Statement.

Takeaways:

While the principles outlined in the Policy Statement provide an indication of how the CFPB will react to conduct it deems to be “abusive,” it falls short of providing clarity on it will deem abusive, thereby continuing the uncertainty regarding the abusive standard that has existed since its inception. Moreover, the principles set forth in the Policy Statement are themselves subject to uncertainty. For example, it is unclear what exactly constitutes consumer benefits or harms and how those factors are weighed to determine whether conduct is abusive; likewise, it is unclear what types of actions are sufficient to demonstrate a good-faith effort to comply with the law under a mistaken interpretation of the abusiveness standard.

Notably, however, the Policy Statement expressly left open “the possibility of engaging in a future rulemaking to further define the abusiveness standard,” which presumably may take the form of enforcement actions, CFPB advisories or other guidance, or updates to the CFPB examination manual.

CFPB Issues Its Fall 2019 Rulemaking Agenda

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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.

Supreme Court to Decide CFPB’s Constitutionality

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A&B ABstract: On October 18, 2019, the Supreme Court granted certiorari in Seila Law v. CFPB to decide the constitutionality of the Consumer Financial Protection Bureau’s leadership structure.[1]  Significantly, the Court also ordered the parties to brief and argue a second question: “If the Consumer Financial Protection Bureau [“CFPB”] is found unconstitutional on the basis of the separation of powers, can 12 U.S.C. § 5491(c)(3) [which permits the President to remove the Director of the CFPB only for cause] be severed from the Dodd-Frank Act?”[2]

A decision on these two questions could significantly affect every financial institution or entity regulated by the CFPB.

The Constitutionality of the CFPB

In response to the 2008 financial crisis, Congress passed the Dodd-Frank Act, which included the Consumer Financial Protection Act (“CFPA”) and created, arguably, one of the most powerful federal agencies to have ever existed—the CFPB.[3]  This power emanates from the CFPB’s single director structure, the CFPB’s broad rulemaking and enforcement authority, and the fact that the CFPB’s Director is insulated from removal except for cause.  Since the CFPB’s inception, there have been numerous challenges to the constitutionality of what is known as the “for-cause” removal provision of the CFPA, which permits the President to remove the Director of the CFPB, not at will, but only “for inefficiency, neglect of duty, or malfeasance in office.”[4]  Challenges have been brought in courts in the Second, Third, Fifth, Ninth, Tenth, Eleventh, and D.C. Circuits.[5]

One of the most significant challenges to the CFPB’s constitutionality occurred before an en banc D.C. Circuit in PHH Corp. v. CFPB.  There, a majority of the D.C. Circuit held that the CFPB’s leadership structure was constitutional, reversing the three-judge-panel decision written by now-Justice Kavanaugh.[6]   Justice Kavanaugh then dissented from the en banc opinion that reversed the original decision. In his dissent, he again concluded that the CFPB’s leadership structure was unconstitutional because the Director’s power and authority were “massive in scope, concentrated in a single person, and unaccountable to the President.”[7]  It is unclear whether Justice Kavanaugh will choose to recuse himself in Seila Law, given that he has already ruled on the issue of the CFPB’s constitutionality in PHH Corp., though he is not required to do so.

One of the most recent challenges, and the one to be reviewed by the Supreme Court, was raised by the law firm Seila Law.  As explained in a previous post,[8] Seila Law involves Seila Law’s refusal to comply with a CFPB civil investigative demand (“CID”).  When the CFPB moved to enforce the CID in federal district court, Seila Law argued that the CFPB’s structure was unconstitutional and, as a result, the CID was unenforceable.  While the CFPB prevailed before the district court, and on appeal to the Ninth Circuit, with the argument that the CFPB’s leadership structure was constitutional, it has since asserted the new position that the for-cause removal provision is unconstitutional.[9]  The Supreme Court has now taken up Seila Law’s petition for certiorari.

The Severability Question

While Seila Law petitioned for certiorari on the issue of whether the CFPB’s leadership structure is unconstitutional, the obvious follow-up question is what happens as the remedy if it is.  That is, what happens if the Supreme Court strikes down the CFPA’s for-cause removal provision?  Recognizing this, when the Supreme Court granted certiorari in Seila Law, it sua sponte also ordered the parties to brief and argue the additional question of whether the for-cause removal provision is severable from the remainder of the CFPA, if the CFPB’s leadership structure is found unconstitutional on the basis of separation of powers.

This is significant because if the Court holds that the provision is not severable, it could strike down the entire CFPA, resulting in any number of drastic consequences.  For example, the Court could strip the CFPB of its enforcement powers or hold that all of the CFPB’s actions to date were ultra vires.  At least one amicus litigant in Seila Law has already made arguments to this end.  The State of Texas’s amicus brief on the certiorari issue took the position that the for-cause removal provision renders the CFPB unconstitutional and, as a result, there is no obligation for Seila Law to answer the CFPB’s CID.[10]

If the provision is found to be severable, then the CFPB likely would proceed with business as usual, even if its structure is held unconstitutional because the remedy would be to make the CFPB’s Director removable at the will of the President.  This is the position the CFPB has taken in recent statements agreeing that its leadership structure is unconstitutional.[11] The CFPB has largely relied on the fact that the Dodd-Frank Act contains a severability clause, which states that “[i]f any provision of this Act . . . is held to be unconstitutional, the remainder of this Act . . . shall not be affected thereby.”[12]  As such, the CFPB has stated that “a Supreme Court decision holding that the for-cause removal provision is unconstitutional should not affect the Bureau’s ability to carry out its important mission [of consumer protection],” because “if the Court holds the for-cause removal provision unconstitutional, the CFPA should remain ‘fully operative’ and the Bureau would ‘continue to function as before, just with a Director who ‘may be removed at will by the President.’”[13]

Notably, though it is unclear what position the Justices will take on the severability issue, Justice Kavanaugh’s original decision in PHH Corp., and his dissent in the en banc review, also touched on severability, finding that “[a]s to remedy . . . [t]he Supreme Court’s Free Enterprise Fund decision and the Court’s other severability precedents require that we sever the CFPB’s for-cause provision, so that the Director of the CFPB is supervised, directed, and removable at will by the President.”[14]

Takeaway

After years of litigation, and conflicting court decisions, the Supreme Court has finally agreed to take on the question of whether the CFPB’s leadership structure is unconstitutional and, if so, what the remedy should be.  That said, even if the CFPB’s leadership structure is found to be unconstitutional, at least one conservative Justice is already on record with the conclusion that the for-cause provision is severable (though Justice Kavanaugh could elect to recuse himself).  While the ultimate outcome is unclear, this case promises to be a major development in the arena of consumer finance and administrative law.

Seila Law will likely be scheduled for oral argument in early 2020, with a decision following in the coming summer.  For now, we will be monitoring the case for developments, including what arguments rise to the top during the briefing process.

[1] https://www.supremecourt.gov/search.aspx?filename=/docket/docketfiles/html/public/19-7.html (Oct. 18, 2019).
[2] Id.
[3] See 12 U.S.C. § 5491.
[4] See 12 U.S.C. § 5491(c)(3); see e.g., CFPB v. Nationwide Biweekly Admin., No. 18-15431 (9th Cir.); CFPB v. CashCall, Inc., No. 18-55479 (9th Cir.); CFPB v. All Am. Check Cashing, Inc., No. 18-90015 (5th Cir.); CFPB v. RD Legal Funding, LLC, No.18-2860 (2d Cir.); Community Fin. Servs. Assoc. v. CFPB, No. 1:18-cv-0295 (W.D. Tex.); CFPB v. Ocwen Fin. Corp., No. 9:17-cv-80495 (S.D. Fla.); BCFP v. Progrexion Mktg., Inc., 2:19-cv-00298 (D. Utah); CFPB v. Navient Corp., 3:17-cv-101 (M.D. Pa.).
[5] See CFPB v. Nationwide Biweekly Admin., No. 18-15431 (9th Cir.); CFPB v. CashCall, Inc., No. 18-55479 (9th Cir.); CFPB v. All Am. Check Cashing, Inc., No. 18-90015 (5th Cir.); CFPB v. RD Legal Funding, LLC, No.18-2860 (2d Cir.); Community Fin. Servs. Assoc. v. CFPB, No. 1:18-cv-0295 (W.D. Tex.); CFPB u. Ocwen Fin. Corp., No. 9:17-cv-80495 (S.D. Fla.); BCFP v. Progrexion Mktg., Inc., 2:19-cv-00298 (D. Utah); CFPB v. Navient Corp., 3:17-cv-101 (M.D. Pa.).
[6] PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75 (D.C. Cir. 2018) (en banc).
[7] PHH Corp., 881 F.3d 75, 166 (Kavanaugh, J., dissenting).
[8] https://www.alstonconsumerfinance.com/cfpb-changes-tack-on-for-cause-removal-provision/.
[9] See CFPB v. Seila Law, No. 19-7 (S. Ct. ), CFPB Br. on Pet. for Cert. (filed Sept. 17, 2019).
[10] See CFPB v. Seila Law, No. 19-7 (S. Ct.), Texas Amicus Br. on Pet. for Cert. at 16.
[11] See September 17, 2019 Letters from Director Kraninger to Speaker Pelosi and Majority Leader McConnell (quoting Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477, 508 (2010)).
[12] See 12 USCS § 5302 (“If any provision of this Act, an amendment made by this Act, or the application of such provision or amendment to any person or circumstance is held to be unconstitutional, the remainder of this Act, the amendments made by this Act, and the application of the provisions of such to any person or circumstance shall not be affected thereby.”).
[13] See September 17, 2019 Letters from Director Kraninger to Speaker Pelosi and Majority Leader McConnell (quoting Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477, 508 (2010)).
[14] PHH Corp., 881 F.3d 75, 167 (Kavanaugh, J., dissenting).

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

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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.

Takeaway

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.

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

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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.