Debt Collection

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On April 4, Georgia Attorney General Chris Carr (“AG Carr”) announced an $8.5 million settlement with a national debt collection company, resolving alleged Fair Debt Collection Practices Act (FDCPA) and the Georgia Fair Business Practices Act violations.

Specifically, AG Carr alleged that the company harassed and deceived consumers by falsely representing to consumers that they were attorneys or otherwise affiliated with government entities, that the consumers had committed a crime and could be imprisoned because of nonpayment, failed to disclose they were debt collectors, attempted to collect illegal payday loans, and divulged information to third-parties without authorization.  The settlement required the company to stop collecting on nearly 12,000 accounts, totaling over $8.5 million in consumer debt, pay a $20,000 civil penalty, and agree to comply with the FDCPA and Georgia Fair Business Practices Act.  Any subsequent failure to do so will cause the company to owe an additional $240,000 civil penalty.

While it may not surprise the collections industry to see a state Attorney General take issue with the alleged actions above, seeing this sort of settlement come out of a Republican attorney general in a solidly Republican state is slightly more interesting.  It is yet another example of significant state-level enforcement but this time, out of a state that is generally not thought of as being particularly active within the collections arena.  Coming after confirmation from the CFPB that it plans to move forward with a third-party collections rulemaking, this recent settlement demonstrates that regardless of party, federal and state regulators continue to be interested in collections and addressing perceived violations arising under both federal and state law.

The CFPB has issued its seventh annual Fair Debt Collection Practices Act report covering the CFPB’s and FTC’s activities in 2017.

The CFPB’s previous FDCPA annual reports began with a message from former Director Cordray.  Unlike those reports, the new report begins not only with a message from CFPB Acting Director Mick Mulvaney but also has an opening message from Maureen K. Ohlhausen, the FTC’s Acting Chairman.

While the new report incorporates information from the FTC’s annual letter to the CFPB describing its FDCPA activities during the year covered by the report, the text of the letter is not included as an appendix to the report as it was in prior reports.  In addition, unlike in prior years, the FTC did not issue a press release about its annual letter concurrently with the issuance of the letter.  Instead, the FTC’s letter on its 2017 FDCPA activities (which is dated February 8, 2018) is linked to a press release issued by the FTC about the CFPB’s report.

Both the CFPB and FTC press releases about the report quote Mr. Mulvaney’s statement that “[f]rom now on, we will be working closely with the FTC to enforce the FDCPA while protecting the legal rights of all in a manner that is efficient, effective, and accountable.”  Mr. Mulvaney’s statement, and the prominence given to Ms. Ohlhausen in the report, perhaps signal that both the CFPB and FTC will continue to take an active, and possibly more coordinated, approach to FDCPA enforcement under the Trump Administration.

With regard to the CFPB’s debt collection rulemaking, the report provides no new insights into the CFPB’s rulemaking plans.  It reviews the CFPB’s debt collection rulemaking activities to date, including its November 2013 Advanced Notice of Proposed Rulemaking, its July 2016 publication of an outline of proposals under consideration in anticipation of convening a SBREFA panel, and its August 2016 convening of the panel.  The report states only that the CFPB “is continuing to consider the feedback it received through the SBREFA panel and from other stakeholders subsequent to the publication of the Outline” and is also “engaged in research and market outreach.”

It is widely thought that the CFPB will not entirely abandon its debt collection rulemaking activities under the Trump Administration.  Continued debt collection rulemaking would be consistent with recent statements by Mr. Mulvaney, such as to the National Association of Attorneys General earlier this month, in which he highlighted the high volume of debt collection complaints and indicated that complaint volume will be a significant factor in how the CFPB sets its priorities.  In his introductory message in the new report, Mr. Mulvaney observed that in 2017 debt collection was “one of the most prevalent topics of complaints about consumer financial products or services received by the Bureau.”

Although the CFPB was expected to propose a debt collection rule under former Director Cordray that covered both first- and third-party collections, the debt collection rule proposals outlined for the SBREFA panel only covered third-party debt collectors.  Accordingly, while the CFPB’s debt collection rulemaking is likely to continue, it is also likely that any debt collection rule proposed by the CFPB under Mr. Mulvaney or a new Director appointed by President Trump would similarly be limited to third-party debt collectors and not cover first-party collections.

Other information set forth in the report includes the following:

  • According to the report’s section on complaints, the CFPB handled approximately 84,500 debt collection complaints in 2017 (which was 3,500 less than in 2016).  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, written notifications about the debt and communication tactics.
  • In the report’s section on the CFPB’s supervision of debt collection activities engaged in by banks and nonbanks subject to CFPB supervision, the CFPB described the following FDCPA violations found by its examiners:
    • Impermissible communications with third parties due to the supervised entity’s failure to adequately confirm that it had contacted the correct party before beginning to discuss the debt
    • Deceptively implying that authorized credit card users were responsible for a debt
    • Falsely representing to consumers the effect on their credit scores of paying a debt in full rather than settling it for less than the full amount
    • Communicating with consumers outside of the hours of 8 a.m. to 9 p.m. or at times the consumers had previously indicated were inconvenient due to the supervised entity’s failure to accurately update account notes and the use of autodialers that based call parameters solely on the consumer’s area code, rather than also considering the consumer’s last known address
  • The CFPB continues to be in active litigation in one FDCPA matter filed in 2015 and another filed in 2016.  In addition, the CFPB “is conducting a number of non-public investigations of companies to determine wither they engaged in collection practices that violate the FDCPA or the CFPA.”
  • In 2017, the CFPB’s public enforcement actions involving debt collection resulted in over $577,000 in consumer relief and over $78,000 paid into the civil penalty fund.  (In dramatic contrast, these amounts in 2016 were, respectively, $39 million in consumer relief and over $20 million paid into the civil penalty fund.)

The CFPB has withdrawn its request to OMB to conduct an online survey of 8,000 individuals as part of its research on debt collection disclosures.  Last month, the CFPB published a notice in the Federal Register that it was submitting its request to OMB and solicited comments which were due by December 14, 2017.

The CFPB’s withdrawal of its request appears to reflect the 30-day regulatory freeze announced by Mick Mulvaney, President Trump’s appointee as CFPB Acting Director.  The withdrawal notice states that “Bureau leadership would like to reconsider the information collection in connection with its review of the ongoing related rulemaking.”

In July 2016, in anticipation of convening a SBREFA panel for the CFPB’s debt collection rulemaking, the CFPB issued an outline of the proposals it was considering.  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.  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.  However, in June 2017, former CFPB Director Cordray announced that the CFPB had decided to proceed first with a proposed rule on disclosures and treatment of consumers by debt collectors and thereafter write a market-wide rule in which it will consolidate the issues of “right consumer, right amount” into a separate rule that will cover first- and third-party collections.

When former Director Cordray announced the CFPB’s change in rulemaking plans, some observers had theorized as a possible rationale that CFPB leadership believed a rule dealing only with third party debt collectors might face less Republican opposition.  Whether debt collection rulemaking by the CFPB will move forward at all under Mr. Mulvaney or a permanent CFPB Director appointed by President Trump is an open question.

The CFPB has published a notice in the Federal Register that it has submitted to OMB its request to conduct an online survey of 8,000 individuals as part of its research on debt collection disclosures.  Comments must be received on or before December 14, 2017.  In June 2017, the CFPB had published a notice in the Federal Register announcing its plans to seek OMB approval for the survey and soliciting comments.

In July 2016, 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 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 its request to OMB, the CFPB has filed Supporting Statements Parts A and B.  As described in Supporting Statement Part A, 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.  The CFPB states in the supporting statements that it plans to share aggregated findings from the survey with the public “as appropriate, for example, in a future study on debt collection or in connection with any potential rulemakings related to debt collection.”

The CFPB had included the sample survey questions in the supporting materials filed in connection with its June 2017 notice but did not include the disclosures.  At that time, the CFPB stated that the disclosures were still under development.  In its new Supporting Statement Part A, the CFPB states that the disclosures “continue to be under consideration and development.”  It also reports that several commenters had expressed concern about the absence of the disclosures from its earlier submission materials.

In response, the CFPB states that it “has concluded that the information contained in the Bureau’s proposed Information Collection is sufficient to allow meaningful comment on the disclosure testing research project, including the research methodology and survey instrument.”  It further states that “[t]he information collection for which the Bureau is seeking OMB approval at this time is for the testing project itself, not the specific content of the draft disclosure forms.  The Bureau believes that the specifics of particular test forms are not needed to comment on the general research methodology and survey instrument.”

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.  However, in June 2017, Director Cordray announced that the CFPB has decided to proceed first with a proposed rule on disclosures and treatment of consumers by debt collectors and thereafter write a market-wide rule in which it will consolidate the issues of “right consumer, right amount” into a separate rule that will cover first- and third-party collections.

When Director Cordray announced the CFPB’s change in rulemaking plans, some observers had theorized as a possible rationale that CFPB leadership believed a rule dealing only with third party debt collectors might face less Republican opposition.  Since the decision whether to move forward with debt collection rulemaking will be made by a CFPB Director appointed by President Trump, that theory will be put to the test.

Much attention has been devoted to the issuance very soon of the CFPB’s small-dollar lending rule.  I thought that once that rule was issued, Richard Cordray would soon thereafter resign as Director to return to Ohio to run for Governor.  However, based on a very reliable source, I now believe that Director Cordray will issue a Notice of Proposed Rulemaking regarding Part I of the debt collection rule (“NPR”) before he resigns.  I believe that the NPR will be issued during September.  Perhaps, that shouldn’t be considered a surprise since the CFPB’s Spring 2017 rulemaking agenda did give a September 2017 estimated date for the issuance of a proposed debt collection rule.  Since the CFPB has a track record for missing estimated deadlines in its rulemaking agendas, I did not think that the CFPB would meet the September 2017 deadline for the proposed debt collection rule.

On June 8, 2017 during the last meeting of the CFPB’s Consumer Advisory Board, Director Cordray revealed a new plan regarding the debt collection rulemaking.  He indicated that Part I of the debt collection rulemaking will concern disclosures by third-party debt collectors and how consumers are treated by third-party debt collectors.  Part II of the debt collection rulemaking will cover the subject of collecting the right amount from the right consumer.  Part II is expected to cover both first-party and third-party debt collectors.

In a recent consent order with a legal collection law firm, the Massachusetts Attorney General imposed significant restrictions on legal collection that go beyond previous CFPB consent orders, which we covered here. We believe that the Massachusetts Attorney General is likely to view at least some of the injunctive provisions in this consent order as setting standards for legal collections in Massachusetts generally, although it is possible that some provisions are unique to this particular case. The substantive provisions of the consent order will likely necessitate creation of new policies, procedures, and compliance monitoring law firms, creditors, debt collectors, and debt buyers engaged in legal collection in Massachusetts.

In addition to the injunctive provisions found in prior CFPB consent orders, the Massachusetts Attorney General consent order imposes the following requirements:

  • The firm must provide a “protected income disclosure” in the first written statement to a consumer, all written statements demanding or soliciting payment, any written statement proposing or confirming settlement, and any written statement proposing or confirming a periodic payment arrangement or court order, which states:

You may not have to pay us while your only income is any of the following: wages up to $550 per week; Social Security benefits; pensions; veterans’ benefits; child support; unemployment benefits; or workers’ compensation benefits.

Please write or call us if you receive income from the above sources or any other government benefits, and we will send you a form for you to complete regarding your income. Although you may not be legally required to pay us from any of the above sources, you may voluntarily pay us using money from any of them. Even if you do not have to pay us at this time, we may still seek a judgment in court against you, if a judgment has not already entered, but you cannot be ordered to pay the judgment from the sources of income listed above. We also reserve the right to make future inquiry about any changes in your financial circumstances.

  • The firm must provide the following oral disclosure anytime it makes an “oral demand, proposal, or request for payment”:

You may not have to pay us at this time if you make less than $550 a week or receive only social security benefits, disability benefits, pension income, child support, or certain other government benefits. Even if you do not have to pay us at this time due to the amount of wages you receive or your receipt of certain government benefits you may make voluntary payments to us using funds from these sources. Do you make less than $550 per week or receive any of these types of benefits or any other government benefits?

  • If the consumer indicates that he or she only has exempt income, the law firm must cease collection attempts and send the consumer a financial form with a pre-addressed return envelope. The law firm is then prohibited from continued collection until one of the following occurs. The law firm may, however, accept voluntary payments from the consumer.
    • The consumer does not respond within 30 days after the law firm mailed the financial form; or
    • The consumer returns the financial form and the law firm “does not have reason to believe a consumer has only exempt income and exempt assets.”
  • If the consumer only has exempt income and is either handicapped or 70 years of age or older, the law firm must cease all collection attempts, and may not file suit against the consumer.
  • If the consumer only has exempt income but is not handicapped or 70 years of age or older, the law firm “may commence and litigate to judgment a collection suit,” subject to the following restrictions:
    • If the court enters a judgment against the consumer, the law firm may only seek an updated financial form from the consumer every 90 days. If it appears from the updated financial form or a “historically reliable source” that the consumer has non-exempt income or assets, the law firm may resume collection of the judgment.
    • If the consumer does not respond to a request for an updated financial form within 30 days, the law firm may resume collection of the judgment.
  • If the law firm “has reason to believe” that a consumer only has exempt income and assets and that the financial situation is unlikely to improve for the foreseeable future, the firm must cancel any pending payment hearings or examinations in small claims court.
  • If the law firm “has reason to believe” that a consumer only has exempt income and assets but that the consumer’s financial situation may improve, the firm must request a continuance of any pending payment hearings or examinations in small claims court. If the court denies the request for a continuance, the law firm is permitted to attend the hearing.
  • If a court determines that the consumer does not have a present ability to pay a debt:
    • The law firm is enjoined from collection unless a court subsequently “enters an order requiring the consumer to pay the debt or the consumer fails to appear for and participate in a subsequent examination,” or the law firm receives a new financial form or other information “reasonably establishing the consumer presently has non-exempt income or non-exempt assets.”
    • But, the law firm may not resume collection or schedule a payment hearing “if it has reason to believe the consumer is unlikely to have a future ability to pay the debt.”
  • The firm may not seek or serve a capias warrant, or other warrant for the consumer’s arrest, while it “has reason to believe a consumer has only exempt income and exempt assets.”
  • The law firm may only submit an affidavit signed by a creditor if the firm verifies the statements in the affidavit with original account-level documentation.
  • If a consumer disputes the validity of a debt verbally or in writing, the law firm must cease collection until it:
    • Obtains and reviews original account-level documentation; and
    • Provides copies of the account-level documentation to the consumer.
  • The law firm is prohibited from filing suit on debt “that would be time-barred but for an alleged post-origination payment unless [the firm] has obtained and reviewed documentation reasonably demonstrating the existence and date of that payment contained in the business records of the party that received the payment.” In essence, the firm must verify that the debt is not time barred.

A federal district court in Atlanta has granted the defendants’ motions for Rule 37 sanctions against the CFPB for its conduct in connection with the defendants’ depositions of CFPB witnesses.  To sanction the CFPB, the court struck four counts from the CFPB’s complaint, and with no claims remaining against them, the court dismissed the defendants who sought the sanctions from the case.

The underlying case is a CFPB enforcement action filed in April 2015 targeting an alleged debt collection scam that named as defendants not only the debt collectors and their individual principals but various companies alleged to have been “service providers” to the collectors, including payment processors.  The CFPB claimed that the payment processors were subject to its enforcement authority as both “covered persons” and “service providers” under the CFPA.

The CFPB’s complaint alleged that the debt collectors, using information purchased from debt and data brokers, made phone calls to consumers in which they threatened arrest or notice to a consumer’s employer unless the consumers agreed to settle debts falsely claimed to be owed.  The CFPB claimed that the payment processors facilitated the alleged scheme by enabling the debt collectors to accept credit and debit card payments.  According to the complaint, the processors engaged in deficient underwriting when they agreed to provide services for the debt collectors and failed to appropriately monitor the debt collectors’ accounts, including by ignoring signs that the debt collectors were committing fraud, such as high chargeback volumes.

The payment processor defendants argued that the CFPB had not presented a knowledgeable witness because its designated witness relied heavily on various “memory aids” and was not prepared to testify as to any exculpatory facts.  The court agreed, characterizing the “memory aids” used by the CFPB’s witness as “scripts” and finding that “the witness was hardly able to offer any testimony beyond what he read off the memory aids.  And…the readings were often unrelated to the question asked.”  According to the court, by displaying an inability to answer follow-up questions or stray from the memory aids, the CFPB’s witness had failed to abide by instructions given by the court that the witness be able “to provide a ‘human touch’ by responding to Defendants’ follow-up questions.”

The court also found that the position taken by the CFPB’s witness that he was unable to identify any exculpatory facts was not reasonable and reflected an unwillingness to comply with the court’s instructions that the CFPB be prepared to testify as to any facts “it could reasonably identify as exculpatory.”  The court found the CFPB’s insistence that it could not find any exculpatory evidence to also reflect “a bad faith attempt to frustrate the purpose of the Defendants’ depositions” and concluded that such conduct amounted to a failure to present a knowledgeable witness.

As their second argument in support of sanctions, the payment processors argued that the CFPB had improperly relied on privilege objections to prevent its witness from answering questions about the factual bases of the CFPB’s claims.  In particular, the processors pointed to the CFPB’s refusal to answer on the basis of work product questions regarding the facts on which the CFPB was relying to establish its claim that the defendants either knowingly or recklessly disregarded unlawful conduct engaged in by the debt collector defendants.

The court found that the CFPB’s continued assertion of privilege objections showed “blatant” and “willful” disregard for the court’s instructions that the CFPB answer questions regarding facts within its knowledge supporting the CFPB’s claims of knowledge or recklessness.  In the court’s view, the CFPB had “put up as much opposition as possible at every turn” to the court’s instruction that it “needed to produce a witness prepared to apprise the Defendants of the facts they would face at trial.”  The court observed that the CFPB’s opposition took two forms: (1) “to bury the Defendants in so much information that it cannot possible identify, with any reasonable particularity, what supports the CFPB’s claims,” and (2) “to assert privilege objections to questions that the Court has repeatedly ordered to be answered.”

Concluding it was not “optimistic that reopening the depositions would be fruitful” in light to the CFPB’s pattern of conduct, the court struck the four counts of the complaint containing the CFPB’s UDAAP and “substantial assistance” claims against the payment processors.  Having stricken all of the CFPB’s claims against them, the court then dismissed these defendants from the case.

We see several significant takeaways from the court’s ruling.  First, it will likely serve as an additional factor to encourage financial services companies to be more willing to litigate CFPB enforcement claims.  We have seen an increase in parties litigating cases with the CFPB recently, and in our view, the success of the defendants in this case will further encourage parties to believe that successfully defending a CFPB enforcement action is a real possibility.

Second, in contested cases, the ruling will provide a road map for parties to seek discovery from the CFPB about the factual basis for its claims and the information discovered during its investigation.  In this sense, the decision really illustrates the level playing field that the CFPB finds itself on when it litigates a case in court, which is very different from the one-way discovery that occurs in connection with a civil investigative demand.

Third, we would hope that the decision will change the CFPB’s approach to participating in discovery in litigation – to be more open about the basis for its claims – in order to prevent its enforcement cases from being disposed of in the manner that played out here, and to carry its motto of being a transparent agency through to its litigated matters.

 

The CFPB has filed an amicus brief in support of the Department of Education’s appeal asking the U.S. Court of Appeals for the Federal Circuit to vacate a preliminary injunction entered by the Court of Federal Claims that bars the ED from assigning defaulted student loans to certain small business private collection agency contractors and other contractors.  The injunction was issued in a lawsuit filed by companies challenging ED decisions not to award or continue contracts with such companies to collect student loans.

In its brief, the CFPB states that “to the extent the trial court’s preliminary injunction precludes the [ED] from assigning or reassigning a debt collector to a borrower’s student-loan account, that injunction implicates the Bureau’s consumer-education mission.”

The CFPB asserts that the trial court was mistaken in suggesting that the October 2016 report issued by its Student Loan Ombudsman supports an injunction precluding the ED from assigning debt collectors to defaulted federal student loans.  According to the CFPB, while the report recommended reforms to the process for collecting and restructuring federal student loan debt, the process as currently structured makes debt collectors “the primary contact for borrowers seeking information about how to rehabilitate, consolidate, or otherwise manage their federal student-loan debt” and “the primary contact for borrowers seeking to make any payment toward defaulted federal student loan debt.”

The CFPB argues that by preventing the ED from assigning debt collectors to defaulted loans, the preliminary injunction impedes or prevents borrowers from managing their federal student loan debt.  As a result, according to the CFPB, the injunction “leaves some borrowers worse off—potentially interfering with access to important consumer protections and preventing some borrowers from making payments toward accruing interest charges—while doing nothing to advance the reforms proposed by the Ombudsman.”  The CFPB asserts that borrowers in default “will be better off if they have access to Education’s debt-collection contractors during the pendency of this litigation than if they do not.”

Regulators from the states of Connecticut, Idaho, Massachusetts, Minnesota and North Dakota (“Participating States”) have entered into a settlement agreement with three affiliated debt collection companies to settle allegations that the companies engaged in collection activities that violated the Fair Debt Collection Practices Act, the FTC Act, and state laws and regulations.  The settlement requires the companies to pay $500,000 to be divided equally among the Participating States.

The agreement indicates that the companies were licensed as collection agencies under the laws of the Participating States.  It also indicates that the Participating States began a multi-state examination of the companies that was conducted concurrently with a targeted review by the CFPB of one of the companies’ federal student loan debt collection activity.  The initial examination review period covered collection activity from February 11, 2013 to February 27, 2015, with consideration also given to activity outside of that period.

In addition to alleging that all of the companies failed to provide access to collection records and submit timely and complete responses to requested information in violation of state statutes and regulations, the agreement alleges that one of the companies engaged in the following unlawful conduct:

  • To meet revenue goals, the company’s agents were directed to make calls to telephone numbers that previously had been designated as “do not call” and to mark the accounts with a special identifier to avoid disciplinary action for violations of law and company policy.  The agreement alleges that such calls violated various FDCPA provisions, such as those limiting third party calls and calls to a consumer at his or her place of employment.  It further alleges that the calls constituted unfair conduct in violation of the Consumer Financial Protection Act’s UDAAP prohibition and also violated specified state statutes and regulations.
  • The company failed to credit payments made by check on the day the check was received and instead delayed credit until the check cleared, which typically took four to five days.  The agreement alleges that such conduct violated the FDCPA prohibition on collecting amounts that are not expressly authorized by the agreement creating the debt or permitted by law, was an unfair or abusive practice in violation of Section 5 of the FTC Act, was unfair, deceptive, or abusive behavior in violation of the CFPA’s UDAAP prohibition, and violated specified state statutes and regulations.

State regulators do not have authority to directly enforce the FDCPA or Section 5 of the FTC Act.  However, many state debt collection statutes (such as the Connecticut statute) require debt collectors to comply with the FDCPA.  Under Section 1042 of the CFPA, state regulators are authorized to bring a civil action to enforce the CFPA’s UDAAP prohibition against state-licensed entities.

In addition to making the $500,000 payment, the settlement agreement requires the companies to establish a compliance management system that meets specified standards for oversight, monitoring, training, and audits.  It also prohibits the companies from continuing to engage in the alleged unlawful conduct, to reimburse consumers for any interest or fees that resulted from not crediting a payment made by check on the date the check was received, and to comply with specified state requirements.

The CFPB has issued a new compliance bulletin (2017-11) to provide guidance on pay-by-phone fees.  The guidance includes examples of conduct relating to pay-by-phone practices identified by the CFPB in its supervision and enforcement activities that may violate or risk violating the Dodd-Frank UDAAP prohibition or the FDCPA.

The enforcement actions cited in the guidance involving alleged UDAAP violations arising from pay-by-phone practices date from 2015 and, while recent CFPB supervisory highlights have discussed potential FDCPA violations arising from “convenience fees” charged by debt collectors to process payments by phone, recent supervisory highlights have not discussed potential UDAAP violations arising from pay-by-phone practices.  As a result, the CFPB’s issuance of the guidance suggests that it intends to give pay-by-by phone practices closer scrutiny in examinations and in enforcement actions.  We have been reviewing and suggesting revisions to many clients regarding their pay-by-phone practices since the CFPB began focusing on this area in examinations.  It is important for creditors and debt collectors to be mindful that such practices may also create a risk of state law violations.

Examples provided of conduct that may violate the UDAAP prohibition include:

  • Failing to disclose the prices of all available pay-by-phone services when different options carry materially different fees.  According to the CFPB, while many companies disclose in periodic billing statements or elsewhere that a transaction fee may apply to various payment methods, they do not disclose the fee amounts and instead depend on phone representatives to do so.  The CFPB observes that phone representatives risk engaging in an unfair practice by only revealing higher-cost options or failing to inform consumers of material price differences between available options.
  • Misrepresenting the available payment options or that a fee is required to pay by phone.  The CFPB observes that some companies charge a fee for expedited phone payments but also offer no-fee phone payment options that post a payment after a processing delay.  According to the CFPB, some of such companies offer their fee-based expedited payment option as their default pay-by-phone option, with the result that consumers could be misled to believe that a fee is always required to pay by phone and cause consumers to be charged for expedited payment even if such consumers did not need to post a payment on the same day.
  • Failing to disclose that a pay-by-phone fee would be added to a payment.  According to the CFPB, a company may risk engaging in a deceptive act or practice by failing to disclose that a pay-by-phone fee will be charged in addition to a consumer’s otherwise applicable payment amount and indicating that only the otherwise applicable payment amount will be charged.  In the CFPB’s view, such conduct may create the misimpression that no pay-by-phone fee is charged.
  • Failing to adequately monitor employees or oversee service providers. The CFPB observes that although a company may have policies and procedures requiring phone representatives to disclose all available pay-by-phone options and fees, deviations from call scripts may cause phone representatives to misrepresent available options and fees.  According to the CFPB, companies can reduce the risk of misrepresentations through adequate monitoring and references its November 2016 compliance bulletin (2016-03) on production incentives.  The CFPB suggests that companies should consider the impact of incentives for employees and service providers may have on compliance risks relating to potential UDAAP violations.

Examples of conduct that may violate the FDCPA:

  • The CFPB notes the FDCPA prohibition on the collection of any amount by a debt collector unless such amount is expressly authorized by the agreement creating the debt or permitted by law.  The CFPB states that its examiners found that one or more mortgage servicers meeting the FDCPA “debt collector” definition violated the FDCPA by charging fees for taking mortgage payments by phone to borrowers whose mortgage instruments did not expressly authorize such fees and who resided in states where applicable law did not expressly permit collection of such fees.

The guidance indicates that the CFPB expects companies to review their practices on charging pay-by-phone fees for potential risks of UDAAP or FDCPA violations and provides suggestions for companies to consider in assessing whether their practices present a risk of constituting a UDAAP or FDCPA violation.  It also advises companies to consider whether production incentive programs create incentives to steer consumers to certain payment options or avoid disclosures.  According to the CFPB, such incentives could enhance the potential risk of UDAAPs if they reward employees or service providers based on consumers using a higher-cost pay-by-phone option or based on the number of daily calls completed.