Debt Collection

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On July 12, 2017, a subcommittee of the House Financial Services Committee will hold a hearing entitled “Examining Legislative Proposals to Provide Targeted Regulatory Relief to Community Financial Institutions.”  The Subcommittee on Financial Institutions and Consumer Credit will examine nine bills that include bills that would: (1) amend the FDCPA, including by classifying debt buyers as “debt collectors” and subjecting debt collectors for federal agencies to FDCPA requirements, (2) require the GAO to study debt collection practices at the federal, state, and local levels; (3) repeal the CFPB’s UDAAP enforcement authority and raise the CFPB’s large depository institutions supervisory threshold to institutions with assets of $50 billion or more, and (4) amend various TILA mortgage-related provisions such as escrow and appraisal requirements.  All nine bills are described in more detail in the Subcommittee Memorandum.

The witnesses scheduled to appear at the hearing are:

  • Robert Fisher, President & CEO of Tioga State Bank on behalf of the Independent Community Bankers of America
  • Rick Nichols, President & CEO of River Region Credit Union on behalf of the Missouri Credit Union Association
  • J.W. Verret, Senior Affiliated Scholar and Associate Professor, George Mason University School of Law

 

 

In his prepared remarks for today’s Consumer Advisory Board meeting, Director Cordray discussed CFPB initiatives in four areas.  In addition to the CFPB’s letter to the top retail credit card companies encouraging them to use zero-interest promotions instead of deferred-interest promotions and its new report on consumers transitioning to credit visibility, Director Cordray discussed the CFPB’s RFI on the small business lending market and its debt collection rulemaking.   

Last month, in conjunction with a field hearing, the CFPB issued the RFI, together with a white paper on small business lending.  In his remarks, Director Cordray revealed that, in response to requests for additional time to respond to the RFI (which currently has a July 14, 2017 comment deadline), the CFPB is extending the comment period by 60 days.  He also indicated that the CFPB has “been hearing from congressional officials who want to see more progress made on [the Section 1071] rulemaking” and that the CFPB is “now moving forward.”   

With regard to the CFPB’s debt collection rulemaking, Director Cordray discussed the debt collection proposals under consideration by the CFPB which it released last July in anticipation of convening a SBREFA panel.  The coverage of the CFPB’s SBREFA proposals was limited to “debt collectors” that are subject to the FDCPA.  When it issued the proposals, the CFPB indicated that  it expected to convene a second SBREFA panel in the “next several months” to address a separate rulemaking for creditors and others engaged in debt collection not covered by the proposals. 

In his remarks, Director Cordray described the proposals as focused on three primary issues: “mak[ing] sure that collectors are contacting the right consumers, for the right amount”; “mak[ing] sure that consumers clearly understand the debt collection process and their rights”; and “mak[ing] sure that consumers are treated with dignity and respect, particularly in their communications with collectors.”  He indicated that when the CFPB evaluated “the feedback we received on the proposals under consideration” (presumably the report of the SBREFA panel on the input received from the small entity representatives who met with the panel), it became clear that “[w]riting rules to make sure debt collectors have the right information about their debts is best handled by considering solutions from first-party creditors and third-party collectors at the same time.”  He observed that “[f]irst-party creditors like banks and other lenders create the information about the debt, and they may use it to collect the debt themselves.  Or they may provide it to companies that collect the debt on their behalf or buy the debt outright.  Either way, those actually collecting on the debts need to have the correct and accurate information.” 

He commented that because “breaking the different aspects of the informational issues into pieces in two distinct rules was shaping up to be troublesome in various ways,” the CFPB has decided to write a market-wide rule in which it will “consolidate all the issues of ‘right consumer, right amount’ into the separate rule we will be developing for first-party creditors, which will now cover these intertwined issues for third-party collectors and debt buyers as well.”   He indicated that this approach will allow the CFPB “to move forward more quickly with a proposed rule focused on the remaining issues” concerning disclosures by debt collectors and how consumers are treated by debt collectors and that “[o]nce we proceed with a proposed rule on these issues, we will return to the subject of collecting the right amount from the right consumer, which is a key objective regardless of who is collecting the debt.”

 

 

In recent remarks, CFPB Director Richard Cordray noted, albeit passingly, the significant role debt collection activities play in the healthy maintenance of consumer credit markets.  “Responsible debt collectors that do their work with care and treat consumers with respect are a natural and even an essential part of the financial marketplace.” (emphasis added.)  A Staff Report that was just released by The Federal Reserve Bank of New York (“FRBNY”) serves to highlight just how essential that role is.  In their Report, Access to Credit and Financial Health: Evaluating the Impact of Debt Collection, the FRBNY staff found that “restricting collection activities leads to a decrease in access to credit and a deterioration in indicators of financial health.”  The staff reached these conclusions after looking at the extent to which certain state statutes reduced collection activity and then looking at the impact that change in collection activity had on consumers.

At the outset, the Report examined two different state legislative schemes to determine their impact on debt collection activities.  Not surprisingly, both legislative schemes lead to an overall decrease in debt collection activities, having “a significant impact on the number of debt collection employees in the state.” (p. 10).  First, the Report found that state legislation increasing licensing and bonding requirements for debt collectors had a tendency to increase the number of small decentralized debt collection agencies, while overall decreasing the number of debt collectors in the state.  Second, the analysis showed that state legislation providing for stricter penalties and increased private remedies for non-compliance with debt collection legislation tended to wipe-out smaller collection agencies and concentrate the practice in establishments with 50 or more employees.

Next, the Report examined the impact of restricted debt collection practices on both access to credit and financial health.  On auto-loans, the report found that originations were “significantly reduced following a tightening in state-level collection legislation” particularly among younger borrowers with low credit scores.  (p. 13).  A similar sizable impact was found on the limits in non-traditional finance (a category of debt including retail cards, personal loans, and various other non-traditional loans).  As a result of these reductions to credit access, the Report found that financial health tended toward a “moral hazard channel.”  In other words, as collection activity and debt recovery decreased, consumer demand for credit increased and individuals who could do so took on more risk and/or over borrowed.  Restricting debt collection activities therefore resulted both in an increase in the number of people with delinquent balances and in the duration of their delinquencies.  While the report found the impact greater on individuals with poor credit, the results were consistent across the credit spectrum.

The Report provides strong empirical support for the position that debt collection, through allowing better enforcement of contracts and increasing the supply of credit at lower interest rates, is an essential part of a healthy consumer credit market.  We urge the CFPB and other federal and state regulators and legislators to be mindful of these conclusions.

In a notice published earlier this week in the Federal Register, the CFPB announced that it plans to seek OMB approval to conduct an online survey of approximately 8,000 individuals as part of its research on debt collection disclosures.  Comments must be received on or before August 4, 2017.

Last July, in anticipation of convening a SBREFA panel for the CFPB’s debt collection rulemaking, the CFPB issued an outline of the proposals it is considering.  The panel met with small entity representatives to discuss the proposals last August.  The proposals included revisions to the form and content of the validation notice, new disclosures for time-barred debts, and a new “obsolescence disclosure” informing the consumer whether a time-barred debt can appear on a credit report.

In support of the OMB request, the CFPB has filed a sample of the survey questions and Supporting Statements Part A and Part B.  As described in Supporting Statement Part B, the survey would test a number of questions related to the disclosures the CFPB is developing in conjunction with its rulemaking, especially with regard to time-barred and “obsolete” debts.  The research will be conducted by a contractor retained by the CFPB that will subcontract with a survey research firm to assist with the administration of the survey.

Through the survey, the CFPB intends to test consumers’ comprehension and decision making using updated versions of disclosures previously used by the CFPB in a study.  The sample survey questions do not include the disclosures, which the CFPB states are “currently being developed.”

The coverage of the CFPB’s SBREFA proposals was limited to “debt collectors” that are subject to the FDCPA.  Despite the CFPB’s statement when it issued the proposals last July that it expected to convene a second SBREFA panel in the “next several months” for creditors and others engaged in debt collection not covered by the proposals, it has not yet done so.

 

Significant changes to West Virginia’s debt collection law will take effect on July 4, 2017.  Senate Bill 536, approved by the state’s governor on April 21, 2017, includes the following amendments:

  • The definition of “debt collector” is amended to exempt attorneys “representing creditors provided that the attorneys are licensed in West Virginia or otherwise authorized to practice law in the State of West Virginia and handling claims and collections in their own name as an employee, partner, member, shareholder or owner of a law firm and not operating a collection agency under the management of a person who is not a licensed attorney.”
  • The time period after which a debt collector may not communicate with a consumer represented by an attorney is increased from 72 hours to “three business days after the debt collector receives written notice from the consumer or his or her attorney that the consumer is represented by an attorney specifically with regard to the subject debt.”  The amendment also requires the notice to “clearly state the attorney’s name, address and telephone number and be sent by certified mail, return receipt requested, to the debt collector’s registered agent, identified by the debt collector at the office of the West Virginia Secretary of State or, if not registered with the West Virginia Secretary of State, then to the debt collector’s principal place of business.”
  • The requirement to include specified disclosures in a written communication with the consumer regarding a debt that is beyond the statute of limitations for filing a legal action for collection is extended to all written communications (instead of only the initial written communication).
  • Creditors and debt collectors are given a right to cure violations.  Before bringing an action for a violation of the debt collection law, a consumer must send a written notice to the creditor or debt collector identifying the alleged violation and factual basis for the alleged violation and give the creditor or debt collector 45 days to make a cure offer.  A cure offer not accepted by the consumer within 20 days is deemed refused or withdrawn.  If a collection lawsuit has already been filed against the consumer and a violation of the debt collection law is asserted as  counterclaim, the creditor or debt collector has 20 days to make a cure offer.  Related issues such as the tolling of the statute of limitations while a cure offer is pending and the admissibility of a cure offer in an action for a violation of the debt collection law are also addressed in the amendment.

 

The CFPB recently submitted an amicus brief to the Eighth Circuit, arguing that a debt collector cannot avoid liability under the FDCPA when it falsely represents the amount of a debt to a consumer’s attorney, rather than to the consumer herself.  The Bureau also contends that the violation of the statutory right to receive truthful information about the amount of a debt is a sufficient injury to confer Article III standing under Spokeo, Inc. v. Robins.

The appeal, Johnson v. Admiral Investments, LLC, was filed after the district court dismissed the plaintiff’s FDCPA lawsuit with prejudice for failure to state a claim.  The complaint alleged that Admiral Investments, LLC, a debt collector, sent plaintiff’s attorney a letter dated October 23, 2015 that claimed plaintiff owed a balance of $10,812.27.  A few months later, however, Admiral claimed in a state court lawsuit filed against plaintiff that she owed only $4,953.47.  Based on these facts, plaintiff asserted that Admiral violated the FDCPA “by falsely representing the character, amount, or legal status of the alleged debt, threatening to take action that cannot legally be taken, and using a false representation or deceptive means to collect a debt.”

Admiral moved to dismiss.  The district court granted the motion, concluding that the 2015 letter did not violate the FDCPA even if it falsely stated the amount of plaintiff’s debt.  The district court applied the Eighth Circuit’s “competent attorney” standard for evaluating whether a communication sent to a consumer’s attorney violates the FDCPA.  The court found that a competent attorney would have determined, and if necessary challenged, whether the debt amount set forth in the 2015 letter was correct.  Thus, according to the district court, the letter could not provide a basis for an FDCPA claim.

In its amicus brief, the Bureau contends that the FDCPA prohibits a debt collector’s misrepresentation of a debt amount whether the misrepresentation is directed at a consumer or the consumer’s counsel.  A consumer and a competent attorney would have the same interpretation of a representation about the amount of a debt.  The Bureau further claims that the district court’s application of the competent attorney standard improperly expected counsel to investigate and challenge the debt collector’s representations.  According to the Bureau, the court’s holding shifted the burden of uncovering a falsehood to the consumer’s attorney, whose client may not have sufficient resources to fund the required investigation, and undermined the FDCPA provisions requiring debt collectors to be honest about the debt amounts they seek to collect.

The Bureau’s brief invites the Eighth Circuit to conclude that a consumer’s attorney should not be required to investigate a debt collector’s alleged misrepresentation.  Such a holding could extend beyond the Eight Circuit to influence cases within the Seventh and Tenth Circuits, which also apply a competent attorney standard to communications with a consumer’s counsel.

The Bureau’s amicus brief also takes issue with Admiral’s argument that the plaintiff lacks Article III standing under Spokeo.  The Bureau stresses that the FDCPA provides consumers with the right to receive truthful information about the amount of their debts.  The violation of this statutory right is a concrete and particularized injury, claims the Bureau, because the debt amount is “central to the debt-collection/consumer relationship” and implicates the “core object” of the FDCPA.

The Bureau’s arguments on this issue position the Eighth Circuit to weigh in on a developing circuit split.  The Eleventh Circuit has concluded, in an unpublished order, that the FDCPA creates a right to receive statutorily-required disclosures, the violation of which is a sufficient injury in fact under Spokeo.  The Sixth Circuit recently disagreed, holding that a bare procedural violation of the FDCPA does not satisfy Spokeo where the resulting harm is not the type of harm the FDCPA was designed to prevent.

Admiral’s answering brief currently is due May 5, 2017.

 

 

A Texas federal district court has entered a $2 million civil penalty judgment against the former president of a debt collection company for alleged violations of the FDCPA and FTC Act.  The judgment follows the court’s finding in a prior order that $2 million was a “reasonable and appropriate penalty for [the president’s] violations of the Fair Debt Collection Practices Act.”  The company and former president had previously been banned by the court from “participating in debt collection activities”  and “advertising, marketing, promoting, offering for sale, selling, or buying any consumer or commercial debt or any consumer information relating to a debt.” 

In January 2015, the DOJ, on behalf of the FTC, had filed a complaint against the company and its former president and vice president alleging that the defendants had engaged in various practices in violation of the FDCPA and FTC Act, including impersonating attorneys and attorneys’ staff and falsely threatening consumers with litigation or wage garnishment.  In April 2016, the court entered summary judgment against the company and former president, stating “the summary judgment record is clear and uncontroverted that [the company] is a debt collector covered by the FDCPA and that its collectors have committed numerous violations of the FDCPA and Section 5 of the FTC Act.”  With regard to the company’s president, the court found that as president and sole owner of the company, he had actual or implied knowledge of the FDCPA violations because he “not only played a role in formulating the policies and practices that resulted in the violative acts, but in fact actually set the policies of his company.  As President, he had the authority to fire or otherwise discipline his employees for employing deceptive debt collection activities.”   In September 2016, the court entered a stipulated order permanently banning the company’s former vice president from participating in debt collection activities and activities related to the sale or purchase of consumer or commercial debts or debt-related consumer information. The order also imposed a $496,000 civil penalty judgment that was suspended except for $10,000 based on inability to pay.) 

In its order finding $2 million to be an appropriate penalty, the court noted that the FTC Act authorizes a penalty of up to $40,000 for each act that violates the FDCPA “with actual or implied knowledge of the FDCPA” and that the “maximum theoretical penalty for the estimated  109,634 violations exceeds $4 billion.”  The court stated that the FTC had established the defendant’s lack of good faith through his admissions that the company had no formal FDCPA training program and that he had hired “abusive collection managers and refused to fire them if they were effective.”  The court also noted his awareness of consumer complaints and that he “he had the ultimate authority over the collection managers and the collectors.”

 

 

The CFPB has issued its sixth annual Fair Debt Collection Practices Act report covering the CFPB’s activities in 2016.

According to the report’s section on complaints, the CFPB handled approximately 88,000 debt collection complaints in 2016, which was 2,900 more than in 2015.  The most common complaint was about attempts to collect a debt that the consumer claimed was not owed.  The second and third most common complaint issues were, respectively, disclosures or providing information sufficient to verify the debt and communication tactics used when collecting debts.

In the report’s section on the CFPB’s supervision of debt collection activities engaged in by banks and nonbanks subject to CFPB supervision under Dodd-Frank and nonbanks that qualify as “larger participants,” the CFPB described the following FDCPA violations found by its examiners:

  • Using unfair acts or practices to collect a debt by selling debts that, as a result of coding errors, did not properly reflect that the account was in bankruptcy, the debt seller had concluded that the account resulted from fraud, or the account had been settled in full
  • Charging of fees not expressly authorized by the agreement creating the debt or permitted by law, such as convenience fees and collection fees prohibited or capped by state law
  • Using false or deceptive means to collect a debt, such as falsely representing that the only option for repayment was using a checking account, misleading consumers by representing that an immediate payment was necessary to prevent a negative impact on the consumer’s credit, and impersonating consumers while using the creditor’s consumer-facing automated telephone system to obtain information about the consumer’s debt
  • Communicating with third parties other than the consumer for a purpose other than to acquire location information, such as by disclosing the debt owed by the consumer to a third party in a telephone conversation due to inadequate identity verification during the call

With regard to rulemaking, Director Cordray, in his introductory message, stated that the CFPB “is considering the feedback it received through the SBREFA panel [which it convened on August 25, 2016] and from other stakeholders subsequent to publication of the Outline [of proposals under consideration.]”  The proposals described in the outline, which the CFPB released in July 2016, only covered “debt collectors” that are subject to the FDCPA.

When it issued the outline, the CFPB stated that it expected to conduct a separate SBREFA proceeding for a rule covering first-party creditors collecting their own debts and others engaged in debt collection not covered by the proposals.  The CFPB’s Fall 2016 rulemaking agenda indicated that the CFPB expected to convene a second SBREFA proceeding in 2017 and gave a February 2017 estimated date for further prerule activities (which would likely include testing of model validation notices and other disclosures.)  Director Cordray did not mention the second SBREFA proceeding in his introductory message to the new report or give a timetable for issuance of a proposed rule covering “debt collectors” subject to the FDCPA.

The report also describes ten debt collection enforcement actions filed by the CFPB in 2016 and three pre-2016 collection actions that continued in 2016.  (Among those actions are the CFPB’s actions against Universal Debt & Payment Solutions, LLC, Navy Federal Credit Union, TMX Finance, LLC, Moneytree, Inc., and CashCall, Inc.)  The report indicates that in 2016, public enforcement actions involving debt collection resulted in over $39 million in consumer relief and over $20 million “paid into the civil penalty fund.”

The report incorporates information provided to the CFPB by the FTC in its letter to the CFPB on the FTC’s 2016 debt collection activities.  (The FTC letter is an Appendix to the report.)

 

 

In a new white paper, “An Overview of the Analytical Flaws and Methodological Shortcomings of the CFPB’s Survey of Consumer Experiences with Debt Collection,” ACA International takes aim at the report released by the CFPB in January 2017 that presented the findings of the CFPB’s national debt collection consumer survey.

In our blog post about the survey, we commented that the CFPB’s current leadership would likely attempt to use the survey to justify the CFPB’s current regulatory focus and lay the groundwork for future enforcement and rulemaking priorities.  In its white paper, ACA charges the CFPB with “potentially manipulating inconclusive results to promote the incorrect perception of debt collectors as predatory.”  ACA concludes that because “the data obtained by the CFPB through the consumer survey is insufficient at best and fundamentally flawed at worst,” it “cannot be used as the basis to properly inform the Bureau’s debt collection rulemaking efforts” and the CFPB “must conduct further study and analysis of the debt collection market before it will be positioned to issue evidence-based, comprehensive rules to regulate this complex industry.”

The analytical flaws and methodological shortcomings of the survey described by ACA include the following:

  • The survey was touted by the CFPB as representing “the first comprehensive and nationally representative data on consumers’ experiences and preferences related to debt collection.”  ACA calls the CFPB’s overall sample of individuals with experience with the debt collection industry “remarkably small,” with only 682 (32%) of the 2,132 survey respondents reporting that he or she was contacted by a debt collector.  ACA states that the CFPB’s claims about the representativeness and overall quality of the data are “undermined by an array of caveats found throughout the report.”  For example, the CFPB minimizes the survey data by describing the report as a “descriptive” exercise to “highlight patterns that may be of policy interest” and “to sketch, from consumers’ perspectives, the broad experience of debt collection.”  In addition, ACA observes that the CFPB leaves the reader without any basis for determining the degree to which the findings are representative of the population as a whole by acknowledging that the report “does not present standard errors or statements about the statistical significance of the differences [across groups of consumers.]”
  • The CFPB’s focus on percentages, coupled with a near-total absence of raw numbers or sample sizes for individual questions provides a limited context for interpreting responses or situating them within the larger sample.  For example, the CFPB reported that “almost one-third of consumers (32 percent) reported being contacted over the past year by a creditor or debt collector about a debt.”  ACA points out that “the inclusion of raw numbers enables a reader to clearly see that the percentage represents roughly 682 consumers out of the 2,132 surveyed.”
  • Many of the findings highlighted in the CFPB’s press release about the survey and Director Cordray’s related remarks relied “on the presentation of a percentage that obscures the total number of responses for a given question.”  For example, the CFPB’s press release highlighted the survey’s finding that “three-in-four consumers report that debt collectors did not honor a request to cease contact.”  According to ACA, “a more accurate description of this finding would note that the 75% of consumers who reported repeated contact after a request to cease communication are a subset of the 42% who requested contact cease [(about 215 consumers)]; this 42% is itself a subset of the 32% of the total sample that have been contacted about a debt in collection [(about 286 consumers)].”  Accordingly, ACA calls the “CFPB’s public statement that ‘three-in-four consumers’ were continuously contacted by debt collectors after requesting contact be ceased… an overt exaggeration.”  In ACA’s view, the CFPB has “implied harassing behavior on the part of debt collectors” by using “a tactic that serves to characterize the debt collection industry as problematic.”

In July 2016, in anticipation of convening a SBREFA panel, the CFPB issued an outline of the proposals it was considering for a rule covering “debt collectors” subject to the FDCPA.  At that time, the CFPB stated that it expected to conduct a separate SBREFA proceeding for a rule covering first-party creditors collecting their own debts and others engaged in debt collection not covered by the proposals.  The CFPB’s Fall 2016 rulemaking agenda indicated that the CFPB expected to convene a second SBREFA proceeding in 2017 and gave a February 2017 estimated date for further prerule activities (which would likely include testing of model validation notices and other disclosures.)

 

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The FTC has sent a letter to the CFPB summarizing the FTC’s debt collection activities in 2016.  The letter is intended to provide the CFPB with information for its annual report to Congress on the federal government’s FDCPA activities.

The letter includes a discussion of the FTC’s collaboration with the CFPB on two amicus briefs in cases involving FDCPA issues.  In one such case, the FTC and CFPB argued in the Seventh Circuit that an unpaid parking fee is a “debt” within the meaning of the FDCPA.  In the other such case, the FTC and CFPB argued in the Ninth Circuit that the FDCPA requirement for a debt collector to provide certain information to the consumer “after the initial communication” does not apply only to the first debt collector that contacts a consumer to collect a particular debt but applies to each debt collector that contacts the consumer to collect that debt.

The letter’s centerpiece is the FTC’s description of its enforcement activities.  The FTC stated that in 2016, it brought or resolved 12 debt collection cases that included the following:

  • Three actions involving “phantom debt collection” in which the defendants were charged with such activities as selling portfolios of fake payday loans used by debt collectors to get people to pay on debts they did not owe, threatening consumers to collect debts they did not owe, and attempting to collect on debts known to be bogus.
  • Three actions against debt collectors for allegedly using text messages, emails and phone calls to falsely threaten consumers with arrest or and lawsuits.
  • An action against debt collectors for allegedly sending letters in connection with the collection of utility bills and government debts that contained threats of arrest appearing to come from a court

The letter also discussed the FTC’s education and public outreach initiatives, such as its work with community-based organizations and national groups that order and distribute FTC information, its development of a series of fotonovelas in Spanish, and its development and distribution of business education materials.  The FTC also described its research and policy development activities, which consisted of holding conferences and workshops and coordination with the CFPB.