Alston & Bird Consumer Finance Blog

UDAAP

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

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A&B ABstract:

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

The Consumer Protection Task Force

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

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

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

NY DFS Adds Former CFPB Deputy Director Leandra English

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

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

Takeaway

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

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.

 

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.

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

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A&B Abstract:

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

Overview of Blog Series

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

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

History of the FDCPA and the Proposed Rule

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

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

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

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

Overview of Proposed Rule

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

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

Takeaway

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