The long-expected CFPB summary of new rule proposals for third-party debt collectors would have major implications not only for the debt collectors themselves, but also for the banks and other financial institutions doing business with debt collectors.
On July 28, the Consumer Financial Protection Bureau (CFPB) released a detailed summary of regulations it is considering imposing on third-party debt collectors.
The CFPB’s proposals serve four purposes:
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Providing clarifications to the Fair Debt Collection Practices Act (FDCPA)
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Imposing heightened substantive restrictions on debt collectors
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Strengthening initial written disclosures that debt collectors must provide when communicating with a consumer
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Directly targeting the data integrity and continuity issues associated with the purchase and sale of delinquent debt
These proposals, once finalized, stand to potentially form the basis of significant “unfair, deceptive, or abusive acts or practices” (UDAAP) enforcement and regulatory actions against large bank and non-bank financial institutions that use third-party debt collectors to collect debts on their behalf or sell charged-off debt to third-party debt collectors.
The CFPB has issued these proposals as an initial consultation under the Small Business Regulatory Enforcement Fairness Act (SBREFA). The CFPB will meet with a panel of small debt collectors, along with representatives of the US Small Business Administration and the Office of Management and Budget, to discuss the impact of the proposals on small businesses. That panel will publish a report of its conclusions within sixty days of the first meeting. Following that process, the CFPB will formally publish a proposed rule in the Federal Register for notice and comment. In previous rulemakings, the formal notice of proposed rulemaking has followed the conclusion of the SBREFA consultation process by between two and four months.
Material Features of the Proposals
This “outline of proposals under consideration” has been highly anticipated since the Dodd-Frank Act gave the CFPB the authority to issue rules under the FDCPA—the first time any federal agency has had that power since the law’s 1977 enactment—and follows the agency’s November 5, 2013 Advance Notice of Proposed Rulemaking on the subject. The proposal solely addresses “third-party” debt collectors—that is, those covered by the FDCPA’s definition of “debt collector”: one collecting on debts owed to another, or who has purchased a debt already in default. The CFPB expects to issue a separate proposal with respect to “first-party” collections under its broader UDAAP prohibition authority in the next few months.
The likelihood of debt collector regulations at this time is all but assured. All third-party debt collectors will face a higher compliance burden if the rules are adopted in anything approaching their current form, although the imposition of more bright-line rules may aid in reducing some of the uncertainty currently involved in FDCPA compliance. Some entities, however, will likely bear much higher costs than others and should pay careful attention to the shape of the proposal as the CFPB continues the rulemaking process this fall and actually publishes proposed regulations:
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CFPB-regulated creditors that significantly rely on debt collectors. Some of the most significant burden of the proposed regulations may fall on entities not directly covered by the regulations at all. The CFPB, along with many other financial regulators, has placed heavy emphasis in recent years on the obligations of regulated creditors to carefully oversee their vendors’ compliance with applicable laws—including debt collectors. Further, in the wake of the CFPB’s 2012 Guidance on financial institution and service provider responsibilities, the agency has frequently used an “assisting and facilitating” theory in taking enforcement actions against users of service providers under its UDAAP prohibition authority. Given the wide dispersion of debt collectors, the CFPB is likely to continue its trend toward indirect enforcement by pressuring larger regulated creditors under its jurisdiction, including banks and non-bank financial institutions such as payday lenders, to monitor and audit debt collectors for compliance with these new regulations. In turn, creditors that rely on third-party debt collectors will see a significant increase in oversight costs to ensure that those collectors have complied with the new regulations—a cost that the creditor will need to bear for each debt collector.
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Debt buyers. The rules under consideration target the purchase and sale of debt, and in particular very-low-value debt. It is likely that entire categories of debt currently sold at minimal values will become unsaleable and uncollectible. The rules the CFPB is considering would require certain minimum information about the original debt to initiate any kind of collection, some of which may be impossible to obtain for debts that have already been sold.[1] The rules would also require the transfer of certain information about communications that the prior collector had with the consumer to the subsequent collector in order to ensure continuity, particularly with respect to the consumer’s assertion of rights under the FDCPA or other applicable law. The proposal also calls for banning certain collection tactics employed in connection with very-low-value debt, such as making an adverse credit report without undertaking active collections.
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Collectors that sue. The rules under consideration would require major changes to the current practices of many collectors that sue to collect debts—including those law firms that fit the definition of “debt collector” under the FDCPA. To avoid improper reliance on default judgments, the proposal calls for the collector to conduct a pre-filing review of background information about the debt to confirm the accuracy of the amount, the consumer debtor, and the collector’s right to enforce. If the collector does not have documentation to establish one of those elements, the collector would be prohibited from filing suit. The proposal would also require transmittal of a pre-litigation disclosure before filing suit and would expressly bar filing suit to enforce time-barred debt.
Initial Takeaways
In light of the regulations the CFPB is considering imposing, we offer the below initial takeaways for debt collectors, debt buyers, and first-party creditors:
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The implications for third-party debt collectors themselves are fairly clear. Among other things, the administrative, recordkeeping, and due diligence duties imposed by these proposals may well render this business unprofitable for many (especially smaller) debt collectors.
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Although these proposals do not directly implicate first-party creditors by their language, they will almost certainly have an indirect impact on first-party creditors that will be expected, under penalty of a UDAAP enforcement action, to assure that vendors acting as debt collectors not only agree to comply with the law but are, in fact, actually doing so. This additional responsibility will fall squarely on the shoulders of lenders, particularly large lenders that have the means and capacity to do so.
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Investors generally known as “debt buyers” need to be cautious—effective immediately. While the CFPB’s latest action is merely a summary of proposals under consideration at this time, if rules along the lines of these proposals are adopted, the rules could render entire investment portfolios uncollectible and, accordingly, either materially impaired or even worthless.
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On a brighter note for some, there is a meaningful business opportunity here for data brokers and software developers that are keenly attuned to privacy considerations. As the rules will require greater due diligence, the only way that this can be accomplished in an economically feasible manner will be through the development of better products to accomplish such due diligence in an expeditious, automated, and inexpensive manner.
[1] Specifically, the proposal would require the collector to have (1) the full name, last known address, and last known telephone number of the consumer; (2) the consumer’s original account number; (3) the date of default; (4) the amount owed at default; (5) the date and amount of any payments or credits after the default; (6) each separate charge for interest or fees after default, and the legal basis for the imposition of interest or fees; and (7) the complete chain of title from the owner of the debt at the time of default to the current collector.
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