Earlier today, I published a blog post explaining why I believe the American Law Institute’s members should not approve the Tentative Draft of the Restatement of the Law, Consumer Contracts (the “Restatement”) on which they will be voting at ALI’s annual meeting next Tuesday in Washington, D.C.  As I indicated in my blog post, the upcoming vote on the Restatement presents an unusual circumstance where both consumer and business groups find themselves in agreement that the Restatement should be rejected by ALI’s members.

On the consumer side, a group of 22 state Attorneys General joined by the D.C Attorney General have sent a letter to ALI’s members urging them to reject the Restatement because, in the AGs’ view, it does not adequately protect the interest of consumers.

We also note that a peculiar controversy has erupted involving Professor Adam Levitin of Georgetown University Law School, a critic of the Restatement, who I interviewed on Tuesday about the Restatement for our podcast.  Adam reportedly made a copy of the Restatement available online so that his blog readers could access the document and better understand the basis for his objections.  In response, he is reported to have received emails from ALI’s leadership demanding that he take down the Restatement and asserting that the Restatement is subject to ALI’s copyright, and that ALI finances its activities by selling copies of its Restatements.  ALI is further reported to have disabled Adam’s access to the ALI web site but, upon being challenged, to have restored his access.  While ALI has reportedly not yet withdrawn its demand that Adam take down the Restatement, ALI is reported to have posted the Restatement on its own web site, outside of the password-protected wall.

 

 

As we reported, a dark cloud is now hanging over the OCC’s decision to accept applications for special purpose national bank (SPNB) charters from fintech companies as a result of the opinion issued on May 2 by a New York federal district court in the lawsuit filed by the New York Department of Financial Services (NYDFS) seeking to block the OCC’s issuance of the charters.  In denying the OCC’s motion to dismiss, the court concluded not only that the NYDFS had established standing to sue and that its claims were ripe for decision, but also that the NYDFS had stated a claim under the Administrative Procedure Act.  In doing so, the court found that the term “business of banking” as used in the National Bank Act “unambiguously requires receiving deposits as an aspect of the business.”

For the reasons we discussed in our blog post, we commented that the court’s conclusion struck us as incorrect and outcome-oriented.  We also commented that in light of the importance of the issue and because the decision casts doubt on SPNB chartering, we would welcome a Second Circuit decision at the earliest opportunity and described two options available to the OCC: seeking an interlocutory appeal (which would require consent of both the district court and the Second Circuit) or agreeing to entry of judgment on the pleadings in favor of the NYDFS (which might make it difficult for the OCC to contest some of the NYDFS’ allegations as to the consequences of SPNB chartering).

Yesterday, the OCC submitted a letter to the district court in which it requested a two-week extension to answer the NYDFS’s complaint and stated that that NYDFS has consented to the request.  To explaining the reason for its request, the OCC stated:

“OCC believes the Court’s order likely renders the matter ripe for entry of a final judgment.  We therefore request additional time to complete our internal deliberations on this issue and confer with plaintiff’s counsel.”

The court has entered an order extending the date by which the OCC must answer or otherwise move with respect to the complaint until May 30, 2019.

 

 

The Federal Reserve Board has published in the Federal Register a notice of proposed rulemaking with request for comment on a proposal to simplify and increase transparency of its rules for determining control of a banking organization.  The proposal’s comment period closes on July 15, 2019.

The proposed revisions to the Board’s control regulations would significantly expand the number of presumptions used by the Board to determine control and would, in codifying those presumptions, provide transparency to investors (including private equity investors) regarding what types of relationships and what types of activities would constitute control of a financial institution or holding company under the Bank Holding Company Act (the “BHC Act”).  Under current regulations, private equity firms are ineligible to register as bank holding companies because they are control companies that are engaged in impermissible activities.

Unfortunately, it appears that the proposal will not expand the ability of an entity to control a bank or bank holding company without being presumed to control the bank or bank holding company or enhance the ability of private equity investors to invest in banks and bank holding companies.  As a result, it would not provide an alternative for fintech companies that are considering filing an application with the OCC for a special purpose national bank (SPNB) charter or for an industrial bank charter in a state such as Utah, that permits such charters

Earlier this month, the New York federal district court hearing the lawsuit filed by the New York Department of Financial Services (NYDFS) seeking to block the OCC’s issuance of SPNB charters dealt a blow to the charter.  In denying the OCC’s motion to dismiss, the court concluded not only that the NYDFS had established standing to sue and that its claims were ripe for decision, but also that the NYDFS had stated a claim under the Administrative Procedure Act.  In doing so, the court found that the term “business of banking” as used in the National Bank Act “unambiguously requires receiving deposits as an aspect of the business.”

As we previously commented, the court’s conclusion on this point strikes us as incorrect and outcome-oriented.  Nevertheless, because the decision makes clear that seeking an SPNB charter entails legal risk, companies in a position to do so may wish to consider other alternatives.  Since the Board’s proposal would not make it easier for a company to control a bank or bank holding company without being presumed to be in control, the two other “bank” alternatives would be to acquire or charter a full service national bank or state bank, where ownership would be subject to the BHC Act, or to acquire or charter an industrial bank under Utah law, where ownership would not be subject to the BHC Act.

A third alternative is to continue or revisit bank partnerships and address the risks created by the Madden decision and “true lender” issues.  Risks inherent in these partnerships could (and should) be mitigated by careful structuring and, potentially, OCC and/or FDIC rulemaking.

For more on the proposal, see the attached discussion.

The Office of the Comptroller of the Currency (OCC) has opened its own “sandbox” through a Proposed Innovation Pilot Program (Program) designed to promote its innovation initiatives, add value through proactive supervision, and continue its objective to lead fintech innovation expansion. The comment period for the Program is open until June 14, 2019.

The Program follows the Consumer Financial Protection Bureau (CFPB)’s Product Sandbox proposal announced September 2018, but the material differences proposed by the OCC limit the potential benefit for participants of its Program. The CFPB’s Sandbox intends to allow participants to test innovative financial products or services without the need to comply with otherwise applicable or potentially applicable statutory or regulatory requirements. There was some initial confusion regarding whether the Sandbox was limited to innovative products or services, such as those typically labeled “fintech,” or offered by “fintech companies.” The CFPB updated its proposal in February to clarify that any covered entities, regardless of its categorization as FinTech, bank, credit union, or otherwise, could apply to participants in the CFPB Sandbox. The OCC’s Program is intended to provide “a consistent and transparent framework for eligible entities to engage with the OCC on pilots, which are small-scale, short-term tests to determine feasibility or consider how a large-scale activity might work in practice.” The OCC contemplates tailoring the terms of each participant’s engagement, including the parameters for each pilot, and allow participants to use other OCC tools and resources with their pilot.

The OCC Program. To “foster constructive innovative ideas to improve the industry,” OCC-supervised financial institutions (i.e., national banks) may submit an expression of interest and propose a pilot individually or as a collaborative effort among multiple banks. The Program is also open to OCC-supervised institutions that have engaged a third party to offer an innovative activity. The use of regulatory tools for the Program would be considered on a case-by-case basis, and the OCC contemplates tools such as interpretive letters, supervisory feedback, and technical assistance from OCC subject matter experts. But regulatory tools will only be considered if their use would not violate existing laws or cause an unsafe or unsound condition. The Program leaves the door open for the OCC to address the legal permissibility of a proposed activity, but requires this determination before any live test.

The Key Difference from the CFPB Sandbox: No Safe Harbor or Immunity. Other than eligibility referenced above, the critical difference between the proposals is the OCC Program’s refusal to provide a statutory or regulatory waiver. Indeed, there is no safe harbor from consumer protection requirements.

CFPB Sandbox participants (only entities subject to CFPB enforcement and jurisdiction are eligible; banks with less than $10 billion in assets are ineligible) receive (i) relief that is substantially the same as that provided in a “no-action” letter (i.e., a statement that the CFPB will not make adverse supervisory findings or bring a supervisory or enforcement action under its UDAAP authority or otherwise), (ii) approvals, as applicable, under the provisions of the TILA, ECOA, and EFTA that provide a safe harbor from liability in federal or state enforcement actions and private lawsuits for actions taken or omitted in good faith in conformity with CFPB approvals, and (iii) exemptions granted by CFPB order (a) from statutory or regulatory provisions as to which the Bureau has statutory authority to issue exemptions by order (such as provisions of the ECOA, HOEPA, and FDIA), or (b) from regulatory provisions as to which the CFPB has general authority to issue exemptions. Such an exemption provides immunity from federal or state enforcement actions and private lawsuits. To learn more about the background and objectives of the CFPB Sandbox, see Ballard Spahr’s blog post and listen to our discussion with Paul Watkins, Director of the CFPB’s Office of Innovation, on Ballard Spahr’s Consumer Finance Monitor Podcast.

Unlike the CFPB Sandbox, entities accepted under the OCC Program will receive no immunity from complying with applicable laws and regulations. Proposals involving consumers are expected to include controls and safeguards to protect consumers from harm. Such controls and safeguards could include consumer notification or consent, suitable processes for complaint handling, and mechanisms for remediation, including timely and fair compensation for any harm to consumers caused during the pilot. CFPB Sandbox participants, however, must commit to compensate consumers “for material, quantifiable, economic harm” caused by the participant’s offering or providing the product or service within the sandbox program. Both the OCC and CFPB have procedures for publishing certain information, but the OCC proposes to maintain confidentiality of proprietary information, including identification of participating entities “to the extent permitted by law or regulation,” while the CFPB intends to publish information about its participants, denials of applications, and reasons for the denial.

Comments to the OCC Program will shed light on whether the OCC’s proposal includes the appropriate scope, protections, and tools to facilitate innovative efforts and provide value for eligible entities, but the outlook is not promising. Without providing safe harbors or waivers for innovative and forward-looking products, the Program stifles creativity and distinguishes itself from the CFPB Sandbox. Without substantial changes to the Program’s proposal, it is unlikely to convince national banks and related entities that the Program’s alleged benefits are worth pursuing. The OCC will review comments after June 14, 2019, consider any refinements to the Program, and announce an effective launch date. Comments on the OCC Program can be submitted at pilotprogram@occ.treas.gov.

Senator Bernie Sanders recently announced that he will be introducing a bill, the “Loan Shark Prevention Act,” that would amend the Truth in Lending Act (15 U.S.C. 1606) (TILA) to establish a “national consumer credit usury rate” that would limit the APR “applicable to any extension of credit” to the lesser of “15 percent on unpaid balances, inclusive of all finance charges” or “the maximum rate permitted by the laws of the State in which the consumer resides” (Sanders Bill).  Representative Alexandria Ocasio-Cortez reportedly will also be introducing the Sanders Bill in the House.

The Sanders Bill would also provide that fees that are not considered finance charges under TILA “may not be used to evade the [rate cap] and the total sum of such fees may not exceed the total amount of finance charges assessed.” Insured credit unions would not be subject to the rate cap.  There is one limited circumstance under which the 15% APR prong may be higher. The Federal Reserve Board “may establish, after consultation with the appropriate committees of Congress, the Secretary of the Treasury, and any other interested Federal financial institutional regulatory agency, an annual percentage rate of interest ceiling exceeding [a 15% APR] for periods of not to exceed 18 months upon a determination that :

  • Money market interest rates have risen over the preceding 6-month period; and
  • Prevailing interest rate levels threaten the safety and soundness of individual lenders, as evidenced by adverse trends in liquidity, capital, earnings, and growth.”

The Sanders Bill would implicitly repeal well-established doctrines under Section 85 of the National Bank Act (enacted in 1864) and its analogue provisions (enacted in 1980) that provide usury authority for other FDIC-insured banks and thrifts. These usury statutes have authorized banks to charge whatever interest rate is authorized under state law to any other lender located in the bank’s home state.  This authority, which is referred to as the “Most Favored Lender” doctrine, has also been interpreted by the U.S. Supreme Court in Marquette National Bank v. First of Omaha Corp., 439 U.S. 299 (1978), and its progeny to authorize banks to “export” throughout the country the interest rate permitted by the law of the state where the bank is located. This additional authority is referred to as the “Exportation” doctrine.

The Sanders’ Bill would implicitly repeal both doctrines which are the linchpin of the country’s robust bank interstate lending programs and have enabled more people to obtain credit than would otherwise be the case.  It would roll back the usury laws to those that existed more than 40 years ago when banks were not engaging in much interstate lending because of such restrictive usury laws.  In place of current law, the bill would substitute for the uniform interest rates that are now used interstate lending programs a patchwork quilt of usury laws and interest rate limits that would vary by state. That change would not only reduce the revenues from such lending programs but also increase the costs, inevitably causing banks to tighten their credit card underwriting standards.

The Sanders Bill is also unclear with respect to the meaning of the term “maximum rate permitted by the laws of the state in which the consumer resides.”  That might reasonably be construed to mean the general usury law of the borrower’s home state.  For borrowers whose home state is Pennsylvania, for example, that general usury rate would be only 6% per annum simple interest even though Pennsylvania law permits banks, credit unions, and consumer finance companies to charge more than 6% to Pennsylvania borrowers on certain types of loans.  If the term is construed to mean the general usury law, practically all lenders, other than credit unions, would be unable to engage profitably in consumer lending and would need to shut down their consumer lending operations.

It seems very unlikely that the Sanders Bill will gain traction in this session of Congress since Republicans control the Senate.  The Sanders Bill seems intended to be a political “talking point” more than a real effort to enact a national consumer usury ceiling.  We can only hope so.

At the American Law Institute’s annual meeting next Tuesday in Washington, D.C., members will be voting on whether to approve a Tentative Draft of the Restatement of the Law, Consumer Contracts (the “Restatement”).  I had the privilege of participating as a panelist on May 6 in a panel discussion about the Restatement at the Thirteenth Annual Judicial Symposium on Civil Justice Issues in Arlington, Virginia, sponsored by the Law & Economics Center of George Mason University’s Antonin Scalia Law School.  Other panelists included Deepak Gupta, a renowned consumer advocate, and Omri Ben-Shahar, one of the Restatement’s Reporters.  History was made at the Symposium.  For the first time I can recall, Deepak and I agreed on something – namely, that the Restatement was bad for consumers and businesses and should be voted down by the ALI’s members.

I served as an Adviser to the Restatement project when it was launched many years ago and felt then, as I do now, that the concept for the project was ill-conceived because it was approached as a law reform project rather than an objective initiative to restate the common law of consumer contracts.  I do not believe that ALI’s reporters have made the case for creating a special Restatement devoted to select issues arising in the business to consumer (B to C) context instead of amending the Restatement (Second) of Contracts or creating a Restatement (Third) of Contracts.  In addition, I have never liked the idea of carving out special rules for B to C contracts as opposed to B to B contracts.  While the rationale for doing so is the adhesive nature of B to C contracts, similar asymmetry of power exists with respect to many B to B contracts, particularly when one of the parties is a small business.  Also, my belief from the outset was that the Reporters did not intend to restate the common law, but rather, as is demonstrated throughout the draft Restatement’s Illustrations and Reporters’ Notes, to engraft into the Restatement federal and state consumer protection statutes, like UDAP and UDAAP.

I also believe that the project was poorly implemented.  While some of the Restatement’s “black letter” statements are unobjectionable, my concerns are principally with the Illustrations and Reporters’ Notes.  As is often the case, the devil is in the details.  Among my key concerns are the following:

  • Several sections collectively override what I always thought was a sacrosanct common law principle – namely that “merger” or “integration” clauses are binding.  Those clauses state that there are no affirmations of fact, promises, or agreements between the parties except those found in the writing.  The Reporters’ Notes and Illustrations state: “Because consumers are not likely to notice, read, or understand the effect of such merger clauses, they do not control the conclusion of whether standard contract terms constitute a partially or completely integrated agreement, and thus do not preclude a finding that the standard contract terms do not constitute the parties final expression of a particular matter.”
  • Section 3, which deals with the modification of standard contract terms, states in subsection (c): “A modification of a standard contract term in a consumer contract is enforceable only if it is proposed in good faith…”  The Reporters’ Notes describe Section 3(c) as providing stronger protection for consumers by targeting the substance of the modified terms, rather than the modification process itself.  The Reporters cite Badie v. Bank of America, 67 Cal. App. 4th 779 (1998), a California Court of Appeals decision that, according to the Reporters, found that good faith only allowed the bank to make modifications to the consumer’s credit card agreement that were within the reasonable contemplation of the parties at the time of the initial contract despite the agreement’s broad change-in-terms provision.  The court used this rationale to not allow the bank to add an arbitration provision to the agreement.  Most courts have distinguished Badie on the basis that other card issuers gave cardholders the right to opt-out.  The ALI Reporters have failed to note this important distinction and instead have made it appear that certain changes can never be made to an open-end agreement if the subject was not addressed in the original agreement.
  • In Section 5, which deals with unconscionability, one of the illustrations of a substantively unconscionable contract term is a class-action waiver if the waiver unreasonably limits consumers’ ability to enforce low-stakes legal rights.  The ALI Reporters have failed to consider the possibility of recovering restitution through government enforcement as well as the costs and ineffectiveness of the class action device and its potential impact on price and access.
  • In Section 6(a), “a contract or a term adopted as a result of a deceptive act or practice by the business is voidable by the consumer….”  Section 6(b) defines “deceptive” as (1) making a material affirmation of fact or promise that is contradicted by or unreasonably limits the standard contract terms; (2) obscuring a charge to be paid by the consumer in the overall cost to the consumer.  This is yet another example where the Restatement imports state and federal UDAP statutes into the Restatement rather than looking to the common law.  “Deception” is alien to the common law.  “Fraud” is compatible with the common law.  The Reporters understood that proving “fraud” at common law requires scienter and reliance, two elements which are not part of a deception case.
  • I also take issue with several of the Illustrations and Reporters Notes dealing with price unconscionability.  The Reporters express agreement with another controversial California opinion, Perdue v. Crocker Nat’l Bank, 38 Cal.3d 913 (1985), where the Court held that a $5 overdraft fee on a checking account is unconscionable.  Yet another example is the discussion of payday loans that are rolled-over on multiple occasions and the use of teaser rates on credit cards.  In both situations, the Reporters concluded that price unconscionability might exist because consumers may not realize the total interest that they will pay if they elect to do multiple rollovers of payday loans or fail to pay the balance owed before the teaser rate expires.

My colleague Fred Miller, who is special counsel in Ballard Spahr’s Consumer Financial Services Group, has written two articles about the Restatement in which he criticizes the Restatement for going beyond the common law as articulated in court decisions and anticipating future trends as perceived by ALI.  A leading authority on Uniform Commercial Code matters, Fred provides specific examples of how the Restatement goes beyond the common law and encroaches on the legislative function.  Fred’s articles are available here and here.

Consumer advocates are also opposed to the Restatement.  Here’s a link to a podcast released on Tuesday of this week in which I interview Professor Adam Levitin of Georgetown University Law School about the Restatement.  Adam, like Deepak, for once was on the same page as me.  While Adam and I often had different reasons for opposing the Restatement, we agreed with one another that the Restatement should be voted down.  Adam has also published a blog post about the podcast in which he discusses why both consumer groups and business groups are opposed to the Restatement.

As part of our continuing discussion of the CFPB’s proposed debt collection rules, we focus in this blog post on a provision that occupies very little real estate in the proposal, but could have tremendous significance: a new “safe harbor” provision relating to meaningful attorney involvement by debt collection law firms, contained in section 1006.18(g) of the proposed rules.

Now, you have seen the concept of meaningful attorney involvement play a prominent role in CFPB enforcement in the past few years.  The Bureau entered into two consent orders with debt collection law firms, setting forth very specific requirements for the exact documents that must be in the law firm’s possession, the exact documents an attorney must review, and the legal issues the attorney must consider before sending a case to the courthouse to be filed.  After that, the Bureau filed an enforcement action against yet another law firm, this one alleging a lack of meaningful attorney involvement in pre-suit collection letters sent by the firm.  The case went to trial and resulted in a judgment for the law firm.  And we are aware that the Bureau is still pursuing enforcement investigations related to meaningful attorney involvement.

Against this backdrop, it is interesting that the Bureau has now proposed a “safe harbor” for debt collection law firms in § 1006.18(g), explaining that the purpose of the proposed rule is “[t]o provide clarity for law firms and attorneys submitting pleadings, written motions, or other papers to courts in debt collection litigation.”  The proposed rule would deem a lawyer to be “meaningfully involved” in filing documents in a debt collection lawsuit if the following standard is met:

[T]he attorney: (1) drafts or reviews the pleading, written motion, or other paper; and (2) personally reviews information supporting the submission and determines, to the best of the attorney’s knowledge, information, and belief, that, as applicable: the claims, defenses, and other legal contentions are warranted by existing law; the factual contentions have evidentiary support; and the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on belief or lack of information.

Sound familiar?  If so, that’s because this standard borrows heavily – and explicitly – from Rule 11 of the Federal Rules of Civil Procedure.  In doing so, however, it represents a significant departure from the standards set forth in the Bureau’s previous consent orders.  Those consent orders, as noted above, contained highly specific requirements for the exact documents an attorney must review, and the precise legal determinations that need to be made, before a lawsuit is filed.  Nothing like this appears in proposed § 1006.18(g).  Rather, an attorney enjoys a “safe harbor” merely by reviewing the pleading and reviewing “information supporting the submission” to support a determination that the claims are warranted by existing law and that there is evidentiary support for the factual assertions in the pleading.

We welcome this simplification of the meaningful involvement standard.  It establishes a clear, well-settled rule for an attorney’s conduct, and hopefully will remove the Bureau from the business of micro-managing attorneys’ representation of their clients in an area where the Bureau has never established any consumer harm.  But one big question remains.  Meaningful attorney involvement claims originated with pre-suit letters but the proposed “safe harbor” only applies to litigation submissions.  So what is the standard for pre-suit letters?  It would be helpful for the Bureau to provide the same desirable clarity for those letters that it has proposed for litigation submissions, and we urge the Bureau to address this issue in the proposed rules.  In line with existing FDCPA precedent, the Bureau should recognize that a letter can include language stating that an attorney has not reviewed the file, or has not made any determination that a suit should be brought, and thereby avail itself of a similar “safe harbor” for sending letters.

 

 

In this podcast, Alan Kaplinsky, who leads our Consumer Financial Services Group, interviews Professor Adam Levitin of Georgetown University Law School about why businesses and consumer advocates are both opposed to the proposed Restatement, which would change the law in ways that will harm businesses and consumers.

Click here to listen to the podcast.

CFPB Director Kraninger has announced that Brian Johnson will serve as the Bureau’s Deputy Director.  Mr. Johnson first joined the Bureau in December 2017 as Senior Advisor to the Director and was named Principal Policy Director in April 2018 by former Acting Director Mulvaney.  Mr. Johnson has served as Acting Deputy Director since he was appointed to that position by Mr. Mulvaney in July 2018.  Before joining the CFPB, Mr. Johnson served as a House Financial Services Committee staff member.

The Bureau also announced additions to its senior leadership and executive teams.  The leadership positions are:

  • Kate Fulton will serve as the Chief Operating Officer.  Ms. Fulton first joined the Bureau in 2013 serving as Senior Counsel in the Legal Division and later in the Office of Supervision, Enforcement and Fair Lending. In 2016, she was named Deputy Chief of Staff and Senior Counsel.  For the last year, she also served as the Acting Chief Operating Officer.  Prior to joining the Bureau, Ms. Fulton served as Attorney Advisor at the U.S. Customs and Border Protection.
  • Yasaman Sutton will serve as Senior Advisor and Counselor to the Director.  Ms. Sutton previously served in the Executive Branch where she provided advice and representation on legal matters affecting the Office of Management and Budget, the White House, the Department of Defense, and the Department of Justice.

The executive positions are:

  • Melissa Brand will serve as the Director of the Office of Civil Rights.  Ms. Brand previously spent almost 10 years at the U.S. Equal Employment Opportunity Commission.  She has been the Bureau’s Equal Employment Opportunity (EEO) Complaints Program Manager since 2016.
  • Jim Rice will serve as the Assistant Director of the Office of Servicemember Affairs.  Mr. Rice has more than three decades of military service, including as the Chief of the Health Services Division for the Chairman of the Joint Chiefs of Staff.

 

 

In this blog post, we attempt to dissect and explore the Bureau’s proposed call frequency and time/place limitations in the recently-released debt collection NPRM.

Proposed Call Frequency Limitations

First, let’s tackle the proposed call frequency limitations.  Section 1006.14(b)(2) prohibits attempting to call (note the use of the word “call,” as opposed to “communicate with”) a consumer about a debt more than seven times within seven consecutive days.  Note that this portion of the proposed rule addresses only call attempts – successful communications will be discussed next.

The proposed call attempt limitation would apply on a per debt basis.  This means that if a consumer has three separate debts, the proposed rule would permit up to a total of twenty-one call attempts – seven per each debt –within a consecutive seven day period, according to the commentary to Section 1006.14(b).  However, in the context of a consumer from whom a collector is attempting to collect multiple debts, accounting for call attempts per debt can become a bit muddled.  The commentary suggests that if a collector intends to discuss (or would intend to discuss) multiple debts in the event that the consumer responds to a call attempt on any one account, the collector would need to count those attempts across all of the accounts that would or could be discussed by the collector.  So, if a collector wishes to be able to place up to seven call attempts on each account, it will need to develop ways to demonstrate that its agents would not discuss any other debts in the event the consumer answered the call.  From a practical perspective, perhaps that could be accomplished without too much fuss if a collectors assigns different debts to entirely different collection teams but, in reality, I suspect that if a consumer wants to discuss paying other debts during a call that was not placed on those accounts initially, a collector is likely to engage in that discussion and attempt to resolve as many debts as possible.  As a result, the de facto impact of the proposed call attempt limits may end up functioning on a per consumer basis in some instances.

However, it is important to note that the proposed call attempt limitation changes significantly when student loans are involved.  Rather than applying the call attempt limit on a per debt basis when attempting to collect a student debt, the Bureau proposes that the call attempt limit apply to all debts that were serviced under a single account number at the time they were placed with the collector.  This means that if the student had three loans, but they all were serviced using the same account number, then the collector is limited to seven call attempts total on the combined group of accounts.  This is an important distinction, and it is important that student lending participants take it into account to avoid potential violations.

It also bears noting that while the proposed call attempt limitation does include limited content messages (i.e., messages that the NPRM states would presumptively not constitute collection communications under the FDCPA – which we will cover in more detail in future blog posts), the proposed rule excludes from its counts any communication made by text or email, call attempts that do not actually connect to the dialed number (i.e., a busy signal or reached a disconnected line), and call attempts to a number that a collector subsequently learns does not actually belong to the consumer it was trying to reach.

Thereafter, once a collector successfully contacts the consumer, there is an additional, mandatory seven-day waiting period before the collector can resume any further call attempts.  The date of the successful communication serves as the first day of the seven-day waiting period.  The proposed rule states that a “successful contact” includes both actually speaking to the consumer and leaving a message (other than a limited content message) for the consumer.  The Bureau further cautions that collectors should remain mindful that a location call or call attempt that does not immediately reach the consumer can become a successful contact if the end result is that contact is made with the consumer.

Finally, the Bureau remarks that calls placed in response to consumer requests for information or a return call are not subject to the call frequency limitations described above, as a consumer can consent to additional calls.

Our read of this NPRM provision suggests that the Bureau is working to transition collection efforts away from relying on outbound calls to consumers, and is instead encouraging consumer contact through other, less intrusive channels.  The Bureau makes a number of statements expressing concern that consumer phones may ring repeatedly, day after day, and indicating that it wants to avoid that type of disturbance.  However, a number of industry participants already have expressed concern that the Bureau’s one size fits all approach to limiting call attempts will not work well across all debt types and consumer profiles.  Some industry groups already have announced plans to provide the Bureau with additional data to support industry claims that this approach will cause disproportionate impacts on certain areas of debt collection.

It also is curious that under the NPRM, ringless voicemails that result in a collections message being left for the consumer also are deemed to be successful communications that trigger the seven-day waiting period.  This seems somewhat out of place, given the goals of this portion of the NPRM (which appear aimed at reducing intrusive telephone calls that ring a consumer’s phone).  In that regard, a ringless voicemail seems more akin to the types of communications that the Bureau proposes to exclude from the contact frequency limitations (i.e., email and text) because a consumer can retrieve and review a ringless voicemail at a time of the consumer’s choosing, using their phone, without hearing an intrusive ring when the message is transmitted.

In sum, we anticipate that the Bureau’s proposed contact frequency limitations will generate a great deal of additional commentary and, hopefully, discussion with the Bureau to determine if there is a more appropriate way to achieve the dual goals of protecting consumers from abuse and effectively assisting consumers in resolving their debts.

Proposed Time and Place Restrictions

Second, let’s look at the NPRM’s proposed time and place restrictions that are broadly applicable to all forms of communication – calls, messages, texts, and emails.  For example, Section 1006.6(b) of the proposed rule prohibits collectors from contacting consumers at unusual or inconvenient times or places.  The proposed rule then provides that attempting to contact a consumer at the consumer’s work phone number or work email is presumptively inconvenient.  (Future blog posts will explore the narrow circumstances when such numbers can be contacted.)

Similarly, attempting to contact the consumer before 8 a.m. or after 9 p.m. in the consumer’s time zone also is presumptively inconvenient.  If the consumer’s time zone is unknown to the collector (perhaps because the consumer’s cell phone and zip code are different), the NPRM would require the collector to only contact the consumer in a window that is simultaneously compliant in all potentially applicable time zones.  Since consumers commonly retain their cell phone numbers as they move around the country, this could present challenges if it significantly decreases the windows within which collectors can contact consumers to assist those consumers to resolve their debts.  A communication is deemed “sent” purposes of compliance with these time window requirements based on when the collector sends the communication to the consumer and not when it is actually received by the consumer.

In addition to these prohibitions, the proposed rule would further prohibit collectors from contacting consumers at other times or places that the collector “knows or should know” are inconvenient.  The Bureau provides a number of examples in the NPRM’s official commentary in an attempt to illustrate this standard and what language is “sufficient” to trigger the collector’s knowledge that the contact is inconvenient.

For example, if a consumer states that he or she cannot talk “at this time of day,” “during these hours,” “during school hours,” or “this is not a good time,” at that point, the collector is deemed to know that further contacts at the location or during that window of time are inconvenient for the consumer, and therefore, prohibited.  However, this standard could prove challenging because it turns on the collector’s understanding of the consumer’s statements during a communication and whether they “sufficiently” convey that the time or place is inconvenient.  What does “during school hours” mean?  How does the collector understand if that means the consumer is in school during the day, at night, only three times a week?  What does “at this time of day” mean?  Does it mean at the time the collector called until the top of the next hour?  A three-hour window?

As we have seen in litigation involving the FDCPA, TCPA, and other similar statutes, attempting to interpret subjective consumer statements and directions in order to avoid potential liability under amorphous standards like “should know” is, at best, often challenging and inconsistent.  For one, how do you calibrate everyone’s interpretation of what the consumer said?  What if the consumer hangs up and clarification is needed to understand what the consumer actually wanted?  It is extremely difficult to implement concrete, clear training standards around these types of subjective, vague legal standards, and we anticipate comments on whether the “should know” standard is appropriate or if more definitive standards and guidelines are necessary.  Indeed, offering more specific guidance could help consumers and collectors alike by allowing consumers to understand how to clearly convey their wishes while reducing potential (and costly) litigation risks for collectors.

Similarly, the proposed rule states that a collector should know that any previously identified inconvenient times or places made known to the creditor or a prior collector by the consumer are inconvenient and prohibited absent the collector receiving consent directly from the consumer to resume contacts at those previously identified inconvenient times or places.  This imposes a substantial information transfer requirement as a debt is assigned or otherwise transferred throughout the collections process.  As a result, increased demands for contractual representations and warranties to reduce potential risk seem likely to protect against potential errors in recording and/or transferring such data to the current collector.

Under the NPRM, consumers retain the ability to allow calls at times or places that are inconvenient with proper consent.  However, the NPRM is clear that consent to receive calls at inconvenient times or places cannot be obtained by the collector in the same communication that led to the collector learning of the inconvenience.

The NPRM also suggests that collectors are barred from contacting a consumer at a work email or work telephone if the collector knows that the employer bars its employees from receiving such communications at work.  As currently stated, this requirement seems to demand that collectors maintain an internal database of employers who prohibit such communications and then scrub all emails and phones numbers against that list (as well as review their entire collections file to ensure they know where the consumer works when such information was included in the file received by the collector, something the Bureau suggests would be appropriate to do).  This seems to pose a daunting compliance task and may be superfluous in that the Bureau already states that contacts at work numbers and work emails are presumptively inconvenient.  Or, perhaps the Bureau means exactly what it says here – that even if a consumer consents to being contacted at work, if the collector knows the consumer’s employer does not allow its employees to receive such communications from other collection experiences or otherwise, the Bureau expects the collector to protect the consumer from violating the employer’s prohibition.  Clarification is needed on this point – do consumers have the right to consent to communications at work if that is their preference in order to resolve their debt or not?

Finally, it is not clear that Section 1006.6(c)’s statement that a consumer’s cease and desist request or refusal to pay request must be submitted “in writing” is something that should be accepted at face value.  On the one hand, through this statement, the Bureau likely is attempting to ensure that collectors are aware that written cease and desist requests can be delivered through available electronic channels (text and email), as well as by mail.  But collectors will be hard pressed to justify disregarding a verbal request by phone for a cease and desist because not honoring such a request not only risks a violation of the FDCPA’s various prohibitions against harassment and unfair treatment, but also risks TCPA and potential state law violations.  Alternatively, perhaps this section supports the argument that a verbal statement that merely states “stop calling me” is not be sufficient to support an argument that the consumer requested a cease and desist, as opposed to simply a stop calling request specific to that number.  This remains yet another of the many areas that are unclear and likely will fall to courts to resolve in future litigation.

We look forward to working with our clients and the collections industry to address these and many other areas in the coming months.