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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

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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 Three: Important Details Relating to Disclosures and Debt Validation Notices

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A&B Abstract

This blog post is part three 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.  This post summarizes the key provisions of the Proposed Rule relating to debt collectors’ disclosures to consumers. These include provisions relating to key proposed disclosures, namely the requirements relating to debt validation notices, and the electronic provision of required disclosures.

Background

Section 809(a) of the FDCPA requires that within five days after the initial communication with the consumer in connection with the collection of any debt, a debt collector must provide the consumer with a validation notice (unless the required information is contained in the initial communication, or the consumer has paid the debt). The statute requires the notice to include:

  • The amount of the debt;
  • The name of the creditor to whom the debt is owed;
  • A statement that unless the consumer disputes the validity of the debt (or any portion thereof) within 30 days after receipt of the notice, the debt collector will assume the debt to be valid;
  • A statement that if the consumer notifies the debt collector in writing during the 30-day period that the debt (or any portion thereof) is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer, and the debt collector will mail the consumer a copy of the verification or judgment; and
  • A statement that, upon the consumer’s request within the 30-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.

Proposed Debt Validation Notice Requirements

To address perceived inadequacies in the processes relating to validation and verification, the Bureau has proposed Section 1006.34 to clarify what validation information debt collectors must provide to consumers.

First, the Proposed Rule would clarify that a debt collector may satisfy the initial disclosure requirement by sending a consumer a validation notice that satisfies the delivery requirements of proposed Section 1006.42(a): (1) in the initial communication; or (2) within five days thereafter.  However, as under Section 809(a), the disclosure requirement does not apply if the consumer has paid the debt prior to the time the notice is required to be sent.  As these provisions are largely consistent with the statute, they do not appear to present significant challenges for implementation.

Second, the Proposed Rule would require the validation information to be “clear and conspicuous,” which the CFPB would define consistent with how that term is used in other consumer financial services laws and implementing regulations.  Accordingly, for a disclosure to satisfy the standard, it would have to be: (1) readily understandable; (2) for a written or electronic disclosure, in a location and type size that are readily noticeable to consumers; and (3) for and oral disclosure, given at a volume and speed that are sufficient for a consumer to hear and comprehend it.

Third, the Proposed Rule would require a debt collector to include in the validation notice information about the debt that would be sufficient to enable the consumer to identify, and determine whether they owe, the debt.  Specifically, such information would include:

  • the consumer’s name and mailing address, which would have to be the most complete information the debt collector obtained from the creditor or another source;
  • the name of the creditor, which the CFPB proposes to make the creditor as of the itemization date;
  • the account number;
  • the amount of the debt;
  • information about consumer protections, including the right to dispute a debt and to request the name and address of the original creditor, as provided under Section 809(b) of the FDCPA; and
  • a consumer response form that a consumer may use to exercise such rights (e.g., submitting a dispute or requesting original creditor information), which would include express elective statements that a consumer could use to ensure that debt collectors provide the appropriate information.

Fourth, to comply with the validation disclosure requirements of Section 809(a) of the FDCPA and 12 C.F.R. § 1006.34 of the Proposed Rule, the CFPB has proposed a Model Validation Form (B-3).  The Bureau would permit a debt collector to adjust the content, format and placement of certain validation information within the model form, provided that the resulting disclosures are substantially similar to the model.

Disclosure of the Amount of Debt

The proposed requirements relating to the amount of the debt are worth note.  First, the Proposed Rule would require a debt collector to disclose both: (1) the current amount of the debt; and (2) the amount of the debt as of the “itemization date.”  The amount would have to be presented in tabular format, and reflect interest, fees, payments, and credits (or, if applicable, a disclosure that no interest, fees, payments, or credits were assessed or applied to a debt).  The Bureau has requested comment on whether the itemization should be more detailed, whether itemization is practicable for all categories of debt, and whether the proposed itemization would cause conflicts with other applicable laws and requirements.

Second, the Proposed Rule would define the “itemization date” as any of the following reference dates on which the debt collector can ascertain the amount of the debt: (1) the last statement date; (2) the charge-off date; (3) the last payment date; or (4) the transaction date;  Notably, while the Proposed Rule would allow a debt collector flexibility in determining which reference date to choose as the “itemization date,” it would require a debt collector to use the same date consistently for disclosures for that same consumer, to ensure that changes in the reference do not undermine the Bureau’s purpose of providing clear and consistent information in disclosures under proposed Section 1006.34.  Additionally, debt collectors would have to take care to identify the creditor as of the chosen itemization date.  The CFPB has requested comments on whether: (1) the proposed definition of “itemization date” will facilitate disclosure, (2) would capture all debt types; (3) whether additional clarification is needed; and (4) whether the potential reference dates should be ordered in a hierarchy in order to improve consumer understanding of the required disclosures.

Third, the Proposed Rule includes special disclosure requirements for the amount of the debt for debt collectors collecting mortgage debt that is subject to Regulation Z, 12 C.F.R. § 1026.41.  Given that that regulation requires the delivery of regular periodic statements that includes itemized fee information, the CFPB’s proposal reflects that for such loans the “amount of the debt” information that would otherwise be required under the Proposed Rule would already be delivered to consumers.  Accordingly, the Proposed Rule would permit a debt collector collecting a mortgage debt subject to the periodic statements requirement of Regulation Z a copy of the most recent periodic statement provided to the consumer at the same time as the validation notice, and refer to the periodic statement in the notice, in order to satisfy the itemization requirement.  In doing so, the Proposed Rule would provide flexibility to mortgage servicers in complying with the “amount due” itemization requirement.  The Bureau is requesting comment on how this exemption would apply to servicers exempt from the periodic statement requirement (e.g., for borrowers in bankruptcy).  However, we note that the periodic statement requirements also do not apply to open-end and reverse mortgage loans.  Thus, it appears that servicers of open-end and reverse mortgage loans would not be given the same flexibility in complying with the “amount due” itemization requirement.  In addition, it is unclear whether the provision of a periodic statement, in lieu of the itemized amount due, could create borrower confusion to the extent the amount listed on the periodic statement materially differs from the “current amount of the debt,” which must continue to be disclosed.

Proposed Validation Period Requirements

In addition to the validation notice requirements discussed above, Section 809 of the FDCPA requires a debt collector to satisfy certain requirements if a consumer, within the 30-day validation period: (1) disputes a debt; or (2) requests the name and address of the original creditor.  To ensure that consumers can take advantage of this protection, the Proposed Rule would require a debt collector to disclose to a consumer the date on which the verification right expires (i.e., the date on which the 30-day period ends).

The Proposed Rule would define the validation period as beginning on the date on which a debt collector provides the validation information, and ending 30 days after the consumer receives or is assumed to receive such information.  Under the Proposed Rule, the latter date would be any date that is at least five business days (excluding Saturdays, Sundays, and legal public holidays) after the debt collector provides the validation information.  If a consumer does not receive the original validation notice, and the debt collector sends a subsequent notice, the Proposed Rule would calculate the validation period from the date of receipt (or assumed receipt) of the subsequent notice.

The Bureau is seeking comment on how debt collectors determine the end of the validation period, and on whether the timing presumption should be modified (including to account for differences in mail versus electronic delivery).

Proposed Provisions Relating to Translation of Disclosures

To address concerns regarding LEP consumers, the Proposed Rule would include provisions relating to the translation of information from validation notices.

Specifically, the Bureau proposes to permit a debt collector to include in a validation notice optional information (in Spanish) on how a consumer may request the notice in Spanish, if the debt collector chooses to provide a Spanish-language translation.  To determine the potential impact of this provision, the CFPB has requested comments on: (1) debt collectors’ current Spanish-language, and other non-English language, collection activities; (2) examples of supplemental Spanish-language instructions to request a translated validation notice; and (3) the benefits and risks of such an approach.

Further, the Proposed Rule would allow a debt collector to provide a translation of the validation notice in any language other than English if the debt collector: (1) also sends an English-language validation notice in the same transmittal; or (2) previously sent an English-language validation notice.  This provision of the proposal recognizes, but does not mirror, obligations that may arise under state law regarding the provision of translated documents to LEP consumers.  By declining to mandate multiple translations, the Bureau’s proposal would avoid imposing significant costs on debt collectors who may not deal with significant LEP populations.  However, the Bureau is seeking comment on whether a debt collector should be required to provide a translated non-English validation notice (in a language other than Spanish) at the request of the consumer.  Such a requirement could expand the cost of compliance with the Proposed Rule, particularly for debt collectors whose exposure to LEP consumers is more limited.

Electronic Disclosure Requirements

To recognize the role that electronic communications play in debt collection activities, the Proposed Rule would:

  • Permit debt collectors to include electronic contact information (website and email address) in the validation notice;
  • If a debt collector sends a validation notice electronically, require the debt collector to include a statement regarding how a consumer can take responsive actions (e.g., disputing the debt) electronically, and permit the debt collector to include such information in a disclosure that is not provided electronically;
  • Require a debt collector to provide required disclosures in a manner that is reasonably expected to provide actual notice and in a form that the consumer can keep and access later; and
  • If a debt collector provides required disclosures electronically, mandate compliance with the federal E-SIGN Act or equivalent processes.

The Bureau is giving particular consideration to how consumers might respond to electronic validation notices.  Specifically, the Proposed Rule considers how a debt collector may include prompts and hyperlinks in validation notices to facilitate consumer responses.  The former director of the Federal Trade Commission’s Bureau of Consumer Protection, David Vladeck, recently published an opinion article in which he highlighted several cybersecurity concerns related to the permissible use of hyperlinks under the Proposed Rule.  Specifically, the former director noted that:

Encouraging use of hyperlinks by unknown parties undermines government warnings about the risks of doing so and exposes consumers to criminal exploitation. Scammers pushing links with viruses, malware, and identity theft scams are almost certain to impersonate debt collectors. Consumers will face a catch-22: Click and risk a virus or a scam, or don’t click and miss potentially legitimate information about why a debt collector is going after you and how to dispute the debt.

In light of the risks highlighted by the former director, and other consumer advocates, it is unclear whether the Proposed Rule’s provisions on the use of hyperlinks will make their way into a Final Rule.

Takeaway

While the Proposed Rule would provide debt collectors some flexibility in determining how to comply with the validation notice requirements, the scope of issues on which the Bureau has requested comment in connection with these provisions leaves open the possibility that the new requirements could be significantly more burdensome to implement. As parts four and five of this blog series will discuss in greater depth, the final requirements that the Proposed Rule would impose, and its nuances, are important to note for debt collectors.

Maine Creates Mortgage Servicer Duty of Good Faith

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Maine is joining the ranks of states whose requirements for mortgage servicers may exceed those of the CFPB’s Mortgage Servicing Rules.  Effective September 19, Senate Paper 415 (2019 Me. Laws 363) creates a mortgage servicer duty of “good faith,” meaning honesty in fact, and the observance of reasonable commercial standards of fair dealing.  This duty applies to the servicing of a residential mortgage (including in any related foreclosure action).  Further, the measure applies the duty to existing provisions of Maine law relating to the conduct of foreclosure mediation, permitting a court to impose sanctions on a servicer who fails to participate in good faith in mediation.

What Activities Are Covered?

“Servicing,” for purposes of the new requirement, means any combination of:

  • receiving a periodic payment from an obligor under the terms of an obligation, including an amount received for an escrow account;
  • making or advancing payments to the owner of an obligation on account of an amount due from the obligor under a mortgage servicing loan document or a servicing contract;
  • making a payment to the obligor under a home equity conversion mortgage or reverse mortgage;
  • evaluating the obligor for, or communicating with the obligor with respect to, loss mitigation;
  • collecting funds from a homeowner for deposit into, and making payments out of, an escrow account; and
  • taking any other action with respect to an obligation that affects the obligor’s payment or performance of the obligation or that relates to enforcement of the obligation.)

What Entities Are Covered?

While the duty of good faith applies broadly, certain entities are exempt.  For purposes of the new requirement, a “mortgage servicer” is a person responsible for:

  • receiving scheduled periodic payments from an obligor pursuant to the terms of a mortgage, including amounts for escrow accounts;
  • making or advancing payments to the owner of the loan or other third parties with respect to amounts received from the obligor pursuant to a loan servicing contract; and
  • evaluating obligors for loss mitigation or loan modification options.

The term includes a person that holds, owns, or originates a mortgage loan obligation if the person also services the obligation.  However, among others, the term does not include a “supervised financial organization,” a “financial institution holding company,” a “credit union service organization,” or a subsidiary of any such entity.  Accordingly, for purposes of the good faith requirement, the term is limited to non-depository entities (i.e., state-licensed servicers).

Penalties

The measure creates substantial penalties for a servicer’s failure to act in good faith.  A violation in connection with a foreclosure action may be remedied by dismissal or stay of the action, or by the imposition of other sanctions that the court deems appropriate for so long as the violation continues.  For violations more generally, an injured homeowner or obligor may recover actual damages and the costs and attorney’s fees incurred in bringing such an action.  Additionally, statutory damages of up to $15,000 are available if the servicer has engaged in a pattern or practice of violating the duty of good faith.  The measure further prohibits a servicer from charging a loan owner for, or adding to the amount of the obligation, any attorney’s fees or other costs incurred as the result of its violation of the duty of good faith.