Sunday, March 2, 2014

Can Recent Enforcement Actions Provide Guidance On The CFPB’s Position On UDAAPs?



           The Dodd-Frank Act gave the Consumer Financial Protection Bureau (“CFPB”) sweeping authority to prohibit the use of “unfair, deceptive or abusive” acts or practices (“UDAAPs”) in connection with the collection of consumer debts.  These terms are broadly defined to provide the CFPB with maximum flexibility when carrying out its consumer protection mission.  But how can a collector know exactly what the CFPB will consider to be an “unfair” or “deceptive” or “abusive” collection practice?   The CFPB has provided some guidance on UDAAPs in the bulletin it released in July 2013 and in the Examination Manual that it published in 2012.  Beyond this, debt buyers and other collectors can read the UDAAP tea leaves by examining the recent enforcement activity of the CFPB and other regulators.


            First, we should start with the UDAAP definitions.  An act or practice will be considered “unfair” if the CFPB finds that it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers” and “such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”  See 12 U.S.C. § 5531(c)(1).  To determine if an act or practice is “unfair” the CFPB “may consider established public policies” but they “may not serve as a primary basis for such determination.”  Id. at § 5531(c)(2).


            An act or practice will be considered “abusive” if the CFPB finds that it “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service” or it “takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service” or “the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service” or “the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”  Id. at § 5531(d).


            An act or practice will be deemed “deceptive” if the CFPB find that it “(1) misleads or is likely to mislead the consumer; (2) the consumer’s interpretation is reasonable under the circumstances; and (3) the misleading act or practice is material.”  See CFPB Bulletin 2013-07, July 10, 2013, Prohibition of Unfair, Deceptive, or Abusive Acts or Practices In The Collection Of Consumer Debts, at p. 3.  The CFBP will consider “the totality of the circumstances” when determining if an act or practice has actually misled or is likely to mislead a consumer, and it will look at implied representations as well as omissions.  Id.  The standard for “deceptive” used by the CFPB under the Dodd-Frank Act will be “informed by the standards for the same terms under Section 5 of the FTC Act.”  Id. at n.16.  If a representation conveys more than one reasonable meaning to consumers, one of which is false, then it may be misleading.  Id. at p. 4. “Material” information is that which is “likely important to consumers” and that “is likely to affect a consumer’s choice of, or conduct regarding, the product or service.” Id. 


             With definitions this broad, it can be difficult for collectors to anticipate what conduct might be considered to be a UDAAP.  One method for identifying areas of potential concern, however, is to analyze the recent enforcement actions by the CFPB and other regulators filed against debt buyers and original creditors.  


             The most comprehensive enforcement action against a debt buyer in recent years was brought by the FTC, not the CFPB.  On January 30, 2012, the FTC entered into a Consent Decree with Asset Acceptance, LLC (“Asset”) relating to its allegedly false, deceptive and misleading debt collection and credit reporting practices. 


             A major focus of the Asset Consent Decree was the concern over the accuracy and reliability of the data underlying Asset’s accounts.  Asset agreed that it would not to make any material representation that a consumer owed any debt unless it had a reasonable basis for making the representation.  Asset agreed that it could reasonably rely on the information provided by original creditors, unless there was a “reasonable indication” – after taking into account the reliability and source of the information – that the information is incomplete, inaccurate, unreliable or that it does not substantiate the claim.  Should Asset discover that the information regarding a specific portfolio of accounts may be unreliable or inaccurate or missing material information, it agreed to terminate collection efforts on the entire portfolio until it conducts a reasonable investigation.  Factors that may call into question the accuracy of a portfolio of accounts include a disproportionately high rate of consumer disputes, lack of availability of documentation, a disproportionately high rate of missing data relating to the accounts in the portfolio, or any other information learned about the credit originator or its methods of doing business that calls into question the accuracy or completeness of the account data.


             Consumer complaints were also a major focus of the Asset Consent Decree.  If a consumer, at any time, questions, disputes or challenges the accuracy or completeness of the information that Asset is relying on, Asset agreed either to close the account permanently and request deletion of the tradeline, or to report the account as disputed and conduct a complete and reasonable investigation into the dispute. 


             The Asset Consent Decree also reflects the FTC’s hostility to collecting time-barred debts.  If Asset knows or should know the debt has passed the applicable statute of limitations for litigation, it agreed to provide the consumer with a new notice stating:  “The law limits how long you can be sued on a debt.  Because of the age of your debt, we will not sue you for it.  If you do not pay the debt, we may continue to report it to the credit reporting agencies as unpaid.”  If the obsolescence period for reporting the debt to consumer reporting agencies has also expired, Asset will provide a notice stating:  “The law limits how long you can be sued on a debt.  Because of the age of your debt, we will not sue you for it, and we will not report it to any credit reporting agency.”  In addition to these notices, Asset agreed to provide consumers with a lengthy new notice on each written communication that summarizes their rights under the FDCPA.  Finally, the Consent Decree provides that Asset will pay a civil penalty of $2.5 million to the FTC.


             Enforcement actions filed against original creditors can also provide guidance to debt buyers and other collectors about areas of CFPB concern.  For example, service provider practices were a major focus of the July 18, 2012 Stipulation and Consent Order between the CFPB and Capital One Bank, (USA) N.A. (“CapOne”) which related to allegedly deceptive practices in the sale of payment protection and credit monitoring products made by CapOne’s service providers during the card activation process.  The CFPB charged that CapOne violated section 5536 of the Dodd-Frank Act when call center representatives employed by CapOne’s service providers deviated from the call scripts, or misinterpreted them, while explaining the products to consumers, and that ‘ineffective oversight” by CapOne had resulted in the failure to detect and prevent these improper sales practices.  Among other things, CapOne agreed to implement a new “Bank Service Provider Management Policy” which, at a minimum, will require: 1) that CapOne assess, before entering into any contract, whether a service provider has the capacity to comply with all consumer protection laws, 2) that CapOne have contracts that require service providers to train their employees on CapOne’s policies and applicable consumer protection laws, and that allow CapOne to terminate the agreement for noncompliance, and 3) that CapOne conduct periodic onsite reviews of the service providers’ controls, performance and information systems.  CapOne agreed to reimburse approximately $140 million to its customers and to pay a $25 million penalty to the CFPB.


             Credit reporting practices, service provider oversight and time-barred debts were a focus of the October 2012 Consent Order between the CFPB and American Express Centurion Bank, Salt Lake City, Utah and American Express Bank, FSB (“Amex”) which related to allegedly unfair, deceptive and abusive practices engaged in by Amex in violation of sections 5531 and 5536 of the Dodd-Frank Act.  The CFPB claimed that Amex had misrepresented to certain consumers that the payment of their debts could improve their credit scores, despite the fact that Amex was not reporting those debts to the consumer reporting agencies.  Amex also allegedly failed to report certain consumer disputes to the consumer reporting agencies.  The CFPB claimed that Amex had failed to implement an effective employee training program regarding applicable consumer protection laws, and had failed to adequately monitor consumer complaints.  According to the CFPB, Amex had failed to properly manage its service providers, who had committed the alleged violations.


             Amex agreed to “continue to provide disclosures concerning the expiration of the Bank's litigation rights when collecting debt that is barred by applicable state statutes of limitations.”  In addition, when collecting on obsolete debt, Amex agreed to provide a new disclosure which states: “The law limits how long a debt can be reported to a consumer reporting agency.  Because of the age of your debt, we cannot report it to a consumer reporting agency.  Payment or non-payment of this debt will not affect your credit score.”  If Amex sells any time-barred or obsolete debt, it must require the buyer to provide consumers with the same disclosures.  Amex agreed to pay $85 million of restitution to cardholders, $14.1 million of civil penalties to the CFPB, and to substantially revise its Compliance Risk Management Program. 


             Telephone harassment, consumer disputes and voice mail messages were a focus of the July 9, 2013 Stipulated Order For Permanent Injunction and Monetary Judgment between the FTC and Expert Global Solutions, Inc., f/k/a NCO Group, Inc. (“NCO”).  NCO agreed that there would be a rebuttable presumption that it intended to annoy, abuse or harass a person if it placed more than one call to any person about a debt after that person had notified NCO “either orally or in writing” that the person refused to pay or wanted NCO to cease further communication.  NCO also agreed not place calls to any telephone number about a particular account if NCO had already been informed by anyone at that number that the debtor cannot be reached at that number or the person does not have location information about the debtor.


             If at any time any person “denies, disputes or challenges” NCO’s claim that they owe a debt, NCO must, within fourteen (14) days, report the debt as disputed to the consumer reporting agencies, or request deletion of the reporting concerning the account.  In addition, following any such dispute, NCO must commence and complete an investigation within thirty (30) days.  If NCO concludes that the consumer owes the debt, it must within fifteen (15) days provide the consumer with verification of the debt, and inform the consumer of NCO’s conclusion and the basis for it.  If NCO concludes that the consumer does not owe the debt, it must within fifteen (15) days inform the consumer of this conclusion, request deletion of the tradeline, cease collection efforts and not sell or transfer the debt.


             Regarding voicemails, NCO agreed that it would not leave any voicemail message that states the first or last name of the debtor and that NCO is a debt collector attempting to collect a debt, or that the debtor owes any debt, unless 1) the greeting on the voicemail includes a first and last name that is the same as the debtor, or 2) NCO has already spoken to the debtor using the phone number associated with voicemail.


             NCO also agreed to provide a new notice to consumers on each written communication sent to collect a debt, as follows: “Federal and state law prohibit certain methods of debt collection, and require that we treat you fairly.  If you have a complaint about the way we are collecting your debt, please visit our website at www.ncogroup.com or contact the FTC online at www.FTC.gov; by phone at 1-877-FTC-HELP; or by mail at 600 Pennsylvania Ave, NW, Washington, DC 20580.  If you want information about your rights when you are contacted by a debt collector, please contact the FTC online at www.ftc.gov.”  NCO also agreed to judgment for a civil penalty totaling $3.2 million.


             Collection litigation practices were the focus of the September 18, 2013 Consent Order between the Office of the Comptroller of the Currency (“OCC”) and JPMorgan Chase Bank, N.A., JPMorgan Bank and Trust Company, N.A., and Chase Bank USA, N.A. (“Chase”).  The OCC alleged that Chase had engaged in “unsafe or unsound banking practices” by, among other things, 1) filing affidavits where the affiant made claims that were not based upon personal knowledge or a review of relevant business records, 2) obtaining judgments based on false affidavits with financial errors in favor of Chase, 3) filing documents that were not properly notarized, and 4) failing to implement policies and procedures to properly oversee internal and external collection litigation processes.  Chase agreed to implement a new Collections Litigation Plan to address the deficiencies in the Bank’s internal collection litigation practices.  When using any third party providers in connection with collection litigation, including law firms, Chase agreed to implement policies and procedures to ensure that the third parties comply with all legal requirements and OCC guidance.  In addition, when selling debt, Chase agreed to ensure that it complies with the OCC’s guidance on debt sales, including conducting due diligence on all debt buyers to evaluate their past and future performance in complying with consumer protection and debt collection laws.


             Robo-signing was a focus of the November 20, 2013 Consent Order between the CFPB and Cash America International, Inc. (“Cash America”).  The Consent Order related in part to the allegedly unfair, deceptive or abusive debt collection practices in violation of section 5531 and 5536 of the Dodd-Frank Act by its Ohio-based subsidiary, Cashland Financial Services, Inc. (“Cashland”).  According to the CFPB, between January 2008 and September 2012, legal assistants employed by Cashland were manually stamping the signatures of managers or attorneys on debt collection affidavits or pleadings without prior review of those affidavits or pleadings by the manager or attorney.  In addition, legal assistants were allegedly notarizing certain debt collection documents without following the procedures required by applicable notary law.  The CFPB found these practices were “unfair” because they “could potentially cause consumers to pay incorrect debts or legal costs and court fees to defend against invalid or excessive claims” and that they were “deceptive” because they were likely to mislead consumers “into believing that the affidavits or other court filings were reviewed, executed, and notarized in compliance with applicable law and this information was material to consumers subject to debt collection litigation.”  According to the CFPB, Cash America had failed to conduct adequate internal compliance audits and had therefore failed to prevent or detect the improper conduct in a timely manner.  Cash America paid $8 million to affected consumers, a $5 million civil penalty to the CFPB, and agreed to implement a comprehensive Compliance Plan designed to ensure compliance with applicable consumer financial laws.


             While it is impossible to predict what the CFPB might consider to be a UDAAP in the future, these recent enforcement actions – which have focused on data integrity, consumer disputes, service provider oversight, time-barred and obsolete debt, telephone harassment, voice mail messages and robo-signing practices – can provide guidance on areas of potential concern. 

Monday, August 19, 2013

When Is A Lawyer Or Law Firm "Regularly" Collecting Debts Under The FDCPA?

Beginning in 1995, when the Supreme Court issued Heintz v. Jenkins, 514 U.S. 291 (1995), lawyers have known that if they seek to collect consumer debts for clients – even when doing so through litigation – they might qualify as a "debt collector" under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et. seq. ("FDCPA). But how often must a lawyer or a law firm engage in consumer debt collection activities before they are subject to the Act? This question has taken on increasing importance in recent years as more law firms have integrated collection work into their existing practices. Unfortunately for practitioners, there are no bright line rules establishing when a lawyer or a law firm has "regularly" engaged in debt collection. As confirmed by a recent decision from the Tenth Circuit, James v. Wadas, _ F.3d _, 2013 WL 3928631 (10th Cir. 2013), the outcome will turn on a case-by-case analysis of multiple factors relating to the practice of the attorney or the firm.

Step one, of course, is to confirm that the attorney or firm is collecting "debts" within the meaning of the FDCPA. Not every unpaid obligation qualifies. The Act defines a "debt" as "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment." 15 U.S.C. § 1692a(5). Click here for more information on what constitutes a "debt" under the FDCPA.

Assuming the lawyer or firm is collecting "debts" as defined by the FDCPA, how often must they do so in order to qualify as a "debt collector" under the Act. Again, the starting place is with the definitions of the statute. Subject to certain limitations, a "debt collector" is defined as "any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another." 15 U.S.C. §1692a(6) (emphasis added).

 
If the "principal purpose" of your firm or your law practice is collecting consumer debts, then you probably know this already, and you know that you are a "debt collector" under the statute. See, e.g., Scott v. Jones, 964 F.2d 314, 316 (4th Cir. 1992) (where 70-80% of attorney’s fees were generated from collection work and attorney filed approximately 4000 collection cases per year during a four year period, the "principal purpose" of his practice was debt collection). The more difficult issue is determining when a lawyer or a firm or firm with a relatively small collection practice is still "regularly" collecting consumer debts. What exactly does "regularly" mean?

The issue was easily resolved in favor of the defendant in James v. Wadas, where the defendant only had one debt collection client in her entire legal career, that client had referred just 6-8 collection cases during the past ten years, and defendant had earned only $1700 in fees on collection matters during the prior year. See 2013 WL 3928631, at *4. As part of its analysis, the Wadas Court considered the Black’s Law definition of the terms "regularly" – which means "[a]t fixed and certain intervals, regular in point in time. In accordance with some consistent or periodical rule or practice" – as well as the term "regular" – which means "steady or uniform in course, practice or occurrence . . . usual, customary, normal or general." Id. at *3. The Court also considered the legislative history surrounding the FDCPA and concluded that it offered "little guidance" on what constitutes "regular" collection by an attorney, other than "such collection cannot be isolated or incidental but must, to varying degrees, be a significant aspect of the attorney’s business."

Ultimately, the Tenth Circuit in Wadas adopted the multi-factor test for determining when a lawyer "regularly" collects debts that had been established by the Second Circuit in Goldstein v. Hutton, Ingram, Yuzek, Gainen, Carroll & Bertolotti, 374 F.3d 56 (2d Cir. 2004). The court considered: "(1) the absolute number of debt collection communications issued, and/or collection-related litigation matters pursued, over the relevant period(s), (2) the frequency of such communications and/or litigation activity, including whether any patterns of such activity are discernible, (3) whether the entity has personnel specifically assigned to work on debt collection activity, (4) whether the entity has systems or contractors in place to facilitate such activity, and (5) whether the activity is undertaken in connection with ongoing client relationships with entities that have retained the lawyer or firm to assist in the collection of outstanding consumer debt obligations. Facts relating to the role debt collection work plays in the practice as a whole should also be considered to the extent they bear on the question of regularity of debt collection activity (debt collection constituting 1% of the overall work or revenues of a very large entity may, for instance, suggest regularity, whereas such work constituting 1% of an individual lawyer's practice might not). Whether the law practice seeks debt collection business by marketing itself as having debt collection expertise may also be an indicator of the regularity of collection as a part of the practice." See Wadas, 2013 WL 3928631, at *4 (quoting Goldstein, 374 F.3d at 62-63).

 Applying this multi-factor test, the Tenth Circuit had no trouble concluding that the defendant was not "regularly" collecting debts: "The record does not demonstrate that Wadas engages in debt collection with any sort of regularity; indeed, over the span of one decade Wadas engaged in only six to eight debt collection cases. Such debt collection activity is minimal. Although the fact that Wadas has an ongoing relationship with Shadakofsky is a factor that would weigh in favor of "debt collector" status, again, the volume of cases accepted from this client comprises only a small portion of Wadas's overall caseload. Other factors also weigh against a finding that Wadas is a "debt collector." For instance, Wadas has not issued debt collection communications, and she does not have any system or personnel to assist with debt collection activity." See Wadas, 2013 WL 3928631, at *5.

Similarly, the defendants were not "debt collectors" in Schroyer v. Frankel, 197 F.3d 1170 (6th Cir. 1999), where the law firm had handled just 50-75 collection cases annually, which represented less than 2% of the firm’s overall practice. Id. at 1173. The firm did not hire any paralegals nor did it use any computer programs for debt collection work. Id. The attorney defendant had only handled 29 collection cases during the year, which was just 7.4% of his practice, and these cases were referred by clients who sent him other matters not involving debt collection. Id. There was no evidence that the defendants handled collection matters for a major client on an ongoing basis, nor was there evidence as to the total fees recovered on collection matters. Id. The Court held that "to find that an attorney or law firm ‘regularly’ collects debts for purposes of the FDCPA, a plaintiff must show that the attorney or law firm collects debts as a matter of course for its clients or for some clients, or collects debts as a substantial, but not principal, part of his or its general law practice." Id. at 1176. The defendants’ collection practices, however, "were incidental to, and not relied upon or anticipated in, their practice of law, and that therefore they should not be held liable as ‘debt collectors’ under the FDCPA." Id. at 1177.

Other cases have been more challenging for defendants. For example, in Garrett v. Derbes, 110 F.3d 317 (5th Cir. 1997), evidence that a lawyer had sent 639 demand letters during a nine month period seeking to collect unpaid telephone bills on behalf of a single client was sufficient to prove he "regularly" collected debts. The district court had granted summary judgment in favor of the attorney, noting that "(1) Derbes' work for Bell South constituted less than 0.5 percent of his entire practice during the nine-month period his law firm represented Bell South, (2) there was no ongoing relationship between Derbes and Bell South, and (3) Derbes had not represented Bell South in other matters." Id. at 318. In reversing the district court, however, the Fifth Circuit noted that "a person may regularly render debt collection services, even if these services are not a principal purpose of his business. Indeed, if the volume of a person's debt collection services is great enough, it is irrelevant that these services only amount to a small fraction of his total business activity; the person still renders them ‘regularly.’" Id.

Similarly, in Goldstein, the law firm had prevailed in the district court on the grounds that it had not "regularly" collected debts, but the Second Circuit reversed. The firm emphasized that it had only derived $5,000 in revenues from collection work during the prior year, which was just 0.05% of its revenue for that period. See Goldstein, 374 F.3d at 61. The Court pointed out, however, that the firm had issued 145 collection notices within that 12-month period, with at least 10 notices sent during 7 of the months, and more than 15 notices sent during 3 of the months. Id. at 63. The firm also had an "ongoing relationship with apparently affiliated entities for which it repeatedly sent collection notices" and that fact "further indicates the regularity of collection work as part of the firm’s business." Id. In addition, the firm had a system in place for preparing and issuing the collection notices. Id.

In Reese v. Ellis, Painter, Ratteree & Adams, LLP, 678 F.3d 1211 (11th Cir. 2012), the Court held that a law firm that allegedly sent 500 letters in connection with foreclosure proceedings could be a "debt collector" under the FDCPA: "The complaint contains enough factual content to allow a reasonable inference that the Ellis law firm is a ‘debt collector’ because it regularly attempts to collect debts. The complaint alleges that the law firm is ‘engaged in the business of collecting debts owed to others incurred for personal, family[,] or household purposes.’ It also alleges that in the year before the complaint was filed the firm had sent to more than 500 people ‘dunning notice [s]’ containing ‘the same or substantially similar language’ to that found in the letter and documents attached to the complaint in this case. That's enough to constitute regular debt collection within the meaning of § 1692a(6)." Id. at 1218.

Thus, there is no magic number of consumer debt collection cases and no set percentage of firm revenues that will make an attorney or a firm into a "debt collector" under the FDCPA. Each of these cases will be decided based on a balancing of multiple factors relating to the nature of the practice of the attorney and the firm.

Saturday, July 20, 2013

Why California Fair Debt Buyer’s Act May Decrease Communication And Increase Litigation Between Debt Buyers And Consumers


            On July 11, 2013, California passed the FairDebt Buying Practices Act, California Civil Code section 1788.50 et. seq., in response to criticism that debt buyers did not have adequate documentation to support the collection lawsuits they were filing against California consumers.  The Act imposes a series of costly new requirements on debt buyers that start before any collection letter is sent to a consumer, and that continue throughout the collection process, including during any collection litigation.   

            Although the Act was designed to protect consumers and increase the information available to them, a likely result of the Act’s new requirements will be to decrease the level of communication between debt buyers and consumers, while increasing the amount of collection litigation.  Debt buyers are not required to call or write to consumers before filing suit, but they often prefer to, so they can offer settlements and identify legitimate consumer disputes.  Under the new Act, however, if a debt buyer wants to send a letter to a consumer, it must already have possession of, or access to, all the documents and information it will need to obtain a default judgment against the consumer.  Given the costs associated with obtaining the required media, debt buyers may become less flexible in their pre-suit settlement offers with consumers.  In addition, some debt buyers may conclude that it is more cost-effective to avoid the pre-suit notice and validation requirements of the Act and to proceed directly to litigation on a larger number of accounts. 

            Thus, the Act may have the unfortunate effect of decreasing the level of communication between consumers and debt buyers, thereby reducing the chance that consumer will be offered a chance to settle the debt, or dispute it, before a lawsuit is filed.

Scope Of The Act

            The Act only applies to debt buyers: it does not apply to creditors, collection agencies or collection attorneys.  A “debt buyer” is defined as “a person or entity that is regularly engaged in the business of purchasing charged-off consumer debt for collection purposes, whether it collects the debt itself, hires a third party for collection, or hires an attorney-at-law for collection litigation.” See Cal. Civ. Code § 1788.50(a)(1).  The term “charged-off consumer debt” means “a consumer debt that has been removed from a creditor’s books as an asset and treated as a loss or expense.”  Id. at § 1788.50(a)(2).  The term “debt buyer” does not include “a person or entity that acquires a charged-off consumer debt incidental to the purchase of a portfolio predominantly consisting of consumer debt that has not been charged off.  Id. at § 1788.50(a)(1).  The Act only applies to consumer debts that are sold or resold on or after January 1, 2014.  Id. at § 1788.50(d).

Information Required Before Writing To Consumers

            The Act regulates information that a debt buyer must possess, and documentation that the debt buyer must have access to, before the debt buyer makes “any written statement to the debtor in an attempt to collect a consumer debt.”  See Cal. Civ. Code § 1788.52.  Note, however, that these requirements only apply if a “debt buyer” as defined by the Act is writing to the consumer, and they would not apply to any collection agency or lawyer retained by the debt buyer.  Id. 

            If the debt buyer decides to write to a consumer, the debt buyer must “possess” the following six items of information at the time of the writing:

“(1) That the debt buyer is the sole owner of the debt at issue or has authority to assert the rights of all owners of the debt.

(2) The debt balance at charge off and an explanation of the amount, nature, and reason for all post-charge-off interest and fees, if any, imposed by the charge-off creditor or any subsequent purchasers of the debt. This paragraph shall not be deemed to require a specific itemization, but the explanation shall identify separately the charge-off balance, the total of any post-charge-off interest, and the total of any post-charge-off fees.

(3) The date of default or the date of the last payment.

(4) The name and an address of the charge-off creditor at the time of charge off, and the charge-off creditor’s account number associated with the debt. The charge-off creditor’s name and address shall be in sufficient form so as to reasonably identify the charge-off creditor.

(5) The name and last known address of the debtor as they appeared in the charge-off creditor’s records prior to the sale of the debt. If the debt was sold prior to January 1, 2014, the name and last known address of the debtor as they appeared in the debt owner’s records on December 31, 2013, shall be sufficient.

(6) The names and addresses of all persons or entities that purchased the debt after charge off, including the debt buyer making the written statement. The names and addresses shall be in sufficient form so as to reasonably identify each such purchaser.”

Id. at § 1788.52(a).

            If the debt buyer decides to write to a consumer, the debt must also “have access to” the following documentation:  “a copy of a contract or other document evidencing the debtor’s agreement to the debt. If the claim is based on debt for which no signed contract or agreement exists, the debt buyer shall have access to a copy of a document provided to the debtor while the account was active, demonstrating that the debt was incurred by the debtor. For a revolving credit account, the most recent monthly statement recording a purchase transaction, last payment, or balance transfer shall be deemed sufficient to satisfy this requirement.”  Id. at § 1788.52(b).

Validation Requirements

            If the debtor makes a written request to the debt buyer “for information regarding the debt or proof of the debt” then the debt buyer must provide the debtor, within 15 calendar days and without charge, all of the information or documents required by sections 1788.52(a) and (b) of the Act.  See Cal. Civ. Code § 1788.52(c).  If the debt buyer cannot provide the documents or information within 15 calendar days, then it must cease further collection efforts until it does provide the documents and information.  Id.

          The debtor’s request for this information, however, must be made “consistent with the validation requirements of section 1692g of Title 15 of the United States Code.”  In other words, the consumer’s request must be made in writing and within 30 days of the receipt of the debt buyer’s validation notice sent under section 1692g of the FDCPA.  See id.  As a result, any verbal requests for validation, or written requests made outside of the 30-day validation period, would not require any response, and if a debt buyer does write to consumers, then it would not be subject to this provision of the Act.

 New Notices To Consumers

            If the debt buyer decides to write to the debtor, then the first letter to the debtor must include “a separate prominent notice” in no smaller than 12-point type that states:  “You may request records showing the following: (1) that [insert name of debt buyer] has the right to seek collection of the debt; (2) the debt balance, including an explanation of any interest charges and additional fees; (3) the date of default or the date of the last payment; (4) the name of the charge-off creditor and the account number associated with the debt; (5) the name and last known address of the debtor as it appeared in the charge-off creditor’s or debt buyer’s records prior to the sale of the debt, as appropriate; and (6) the names of all persons or entities that have purchased the debt. You may also request from us a copy of the contract or other document evidencing your agreement to the debt. A request for these records may be addressed to: [insert debt buyer’s active mailing address and email address, if applicable].”  See Cal. Civ. Code § 1788.52(d)(1). 

            In addition, if the debt buyer is writing to the consumer about a “time-barred debt” where the obsolescence period of the Fair Credit Reporting Act has not yet expired, the debt buyer must also include the following notice in no less than 12-point font: “ The law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it. If you do not pay the debt, [insert name of debt buyer] may [continue to] report it to the credit reporting agencies as unpaid for as long as the law permits this reporting.”  Id. at §1788.52(d)(2).  The term “time-barred debt” is not defined by the Act, but it is safe to assume that the term refers to a debt where the applicable statute of limitations for suit has expired. 

            If the debt buyer is not furnishing information to the consumer reporting agencies about the debt, however, a consumer might argue that sending this notice falsely implies that the debt buyer is doing so.  A debt buyer who is not a furnisher should be able to omit this notice in order to avoid potential liability under the FDCPA.  This reading is consistent the provision of the Act provides that “In the event of a conflict between the requirements of subdivision (d) and federal law, so that it is impracticable to comply with both, the requirements of federal law shall prevail.”  See Cal. Civ. Code §1788.52(f).

            If the debt buyer is writing to a consumer about a time-barred debt and the obsolescence period of the Fair Credit Reporting Act has also run, the debt buyer must also include the following notice in no less than 12-point font: “The law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it, and we will not report it to any credit reporting agency.”  See Cal. Civ. Code § 1788.52(d)(3). 

Documenting Settlements And Payments

            The Act requires that all settlement agreements between a debt buyer and a debtor must be “documented in open court or otherwise reduced to writing” and that a debt buyer must ensure  the debtor is provided with a written copy of the agreement.  See Cal. Civ. Code § 1788.54(a).  Whenever a debt buyer receives a payment on a debt, it must within 30 calendar days provide a receipt or monthly statement to the debtor that “shall clearly and conspicuously show the amount and date paid, the name of the entity paid, the current account number, the name of the charge-off creditor, the account number issued by the charge-off creditor, and the remaining balance owing, if any.”  Id. at § 1788.54(b).  The receipt or statement can be provided electronically if the parties agree.  Id.  If the debt buyer accepts a payment as a payment in full, or as a full and final compromise of the debt, the debt buyer must also provide a similar written statement or receipt to the debtor.  Id. at § 1788.54(c).  A debt buyer may not “sell an interest in a resolved debt, or any personal or financial information related to the resolved debt.”  Id.

Requirements For Complaints Filed In Collection Litigation

            The Act prohibits a debt buyer from filing suit or initiating an arbitration or other legal proceedings to collect a consumer debt if the applicable statute of limitations on the debt buyer’s claim has expired.  See Cal. Civ. Code § 1788.56.  When a debt buyer does file suit, the Act includes nine specific requirements that must be included in the allegations of the complaint, as follows:

“(1) That the plaintiff is a debt buyer.

(2) The nature of the underlying debt and the consumer transaction or transactions from which it is derived, in a short and plain statement.

(3) That the debt buyer is the sole owner of the debt at issue, or has authority to assert the rights of all owners of the debt.

(4) The debt balance at charge off and an explanation of the amount, nature, and reason for all post-charge-off interest and fees, if any, imposed by the charge-off creditor or any subsequent purchasers of the debt. This paragraph shall not be deemed to require a specific itemization, but the explanation shall identify separately the charge-off balance, the total of any post-charge-off interest, and the total of any post-charge-off fees.

(5) The date of default or the date of the last payment.

(6) The name and an address of the charge-off creditor at the time of charge off, and the charge-off creditor’s account number associated with the debt. The charge-off creditor’s name and address shall be in sufficient form so as to reasonably identify the charge-off creditor.

(7) The name and last known address of the debtor as they appeared in the charge-off creditor’s records prior to the sale of the debt. If the debt was sold prior to January 1, 2014, the debtor’s name and last known address as they appeared in the debt owner’s records on December 31, 2013, shall be sufficient.

(8) The names and addresses of all persons or entities that purchased the debt after charge off, including the plaintiff debt buyer. The names and addresses shall be in sufficient form so as to reasonably identify each such purchaser.

(9) That the debt buyer has complied with Section 1788.52.”

See Cal. Civ. Code 1788.58(a).  In addition, a copy of the contract or document described in section 1788.52(b) must be attached to the complaint.  Id. at § 1788.58(b).  The debt buyer must ensure, however, that it does not disclose with the complaint any “personal, financial, or medical information, the confidentiality of which is protected by any state or federal law.”  Id. at § 1788.58 (c). 

Requirements For Defaults In Collection Litigation

            The Act also governs the requirements for a debt buyer to obtain a default judgment.  Specifically, it provides that no default may be entered for a debt buyer “unless business records, authenticated through a sworn declaration, are submitted by the debt buyer to the court to establish the facts required to be alleged by paragraphs (3) to (8), inclusive, of subdivision (a) of Section 1788.58" and the debt buyer submits a copy of the contract or other document required by section 1788.52(b) of the Act, also authenticated through a sworn declaration.  See Cal. Civ. Code §§ 1788.60(a), (b). 

             If this information is not provided by the debt buyer, then the court shall not enter a default judgment and it may, in its discretion, dismiss the action.  Id. at § 1788.60 (c).  If the debt buyer does submit this information, however, there can be no dispute that the requirements for entering a default judgment have been met, and judgment should be entered for the debt buyer as a matter of course.  One of the purposes of the Act, after all, was to provide “enforceable standards” for the litigation of charged-off debt and to “provide needed clarity to courts” about debt buyer litigation.  See Cal. Civ. Code § 1788.50 (Legislative Findings, sections (b), (e) and (f).

             In the event an action brought by a debt buyer proceeds to trial and the debtor appears for trial, but the debt buyer does not appear or is not prepared to proceed, if the court does not find good cause for continuance, it may, in its discretion, dismiss the action with our without prejudice.  The court may also award the debtor’s costs of preparing for trial, including any lost wages and transportation expenses.  See Cal. Code Civ. Proc. § 581.5.

 Remedies For Violating The Act

             The Act provides if a debt buyer violates the Act with respect to any person, it shall be liable to that person in an amount equal to the sum of: 

 “(1) Any actual damages sustained by that person as a result of the violation, including, but not limited to, the amount of any judgment obtained by the debt buyer as a result of a time-barred suit to collect a debt from that person.

 (2) Statutory damages in an amount as the court may allow, which shall not be less than one hundred dollars ($100) nor greater than one thousand dollars ($1,000).

See Cal. Civ. Code § 1788.62(a)(1), (2).  In the case of a successful action to enforce the Act, the court shall also award costs and reasonable attorney’s fees to the debtor.  Id. at § 1788.62(c)(1).

            In the case of a class action, the debt buyer shall be liable to any named plaintiff for any statutory damages of not less than $100 nor more than $1000.  Id. at 1788.62(b).  Class members do not get these statutory damages, but if the Court finds that debt buyer “engaged in a pattern and practice of violating any provision” of the Act, then the Court may award “additional damages to the class in an amount not to exceed the lesser of five hundred thousand dollars ($500,000) or 1 percent of the net worth of the debt buyer.”  Id.  These additional damages are not automatically awarded in a class action.  Rather, when determining whether to award any additional damages, the Court will use the same set of factors set forth in the FDCPA, which include “among other relevant factors, the frequency and persistence of noncompliance by the debt buyer, the nature of the noncompliance, the resources of the debt buyer, and the number of persons adversely affected.”  Id. at § 1788.62(d). 

            Debt buyers are entitled to raise the “bona fide error” defense, and they will have no liability for a violation if they demonstrate “by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error, and occurred notwithstanding the maintenance of procedures reasonably adopted to avoid any error.”  Id. at § 1788.62(e).  In addition, if the debt buyer can prove that the debtor’s “prosecution of the action was not in good faith” the debt buyer is entitled to recover its reasonable attorney’s fees.  Id. at § 1788.62(c)(2).

            Significantly, the remedies provided in the Act are not cumulative of the FDCPA and Rosenthal Act.  The Act specifically provides that if a debtor recovers in an action brought under the Rosenthal Act or the FDCPA this “shall preclude recovery for the same acts in an action brought under this title.”  See Cal. Civ. Code § 1788.62(g). 


Tuesday, February 5, 2013

Where’s The Beef? The FTC 2013 Report On Debt Buyers Contains Zero Evidence Of Debt Collection Abuses

The FTC recently released its 162-page report entitled "The Structure and Practices of the Debt Buying Industry" which describes a comprehensive study conducted by the FTC over a three-year period using data obtained from the nation’s largest debt buyers. Many will view the Report as another chance to engage in debt buyer bashing, which has become a favorite pastime for mainstream media and consumer advocates.

A close read of the Report, however, reveals that it contains absolutely zero evidence that any debt buyer has engaged in any of the headline-grabbing collection abuses that we always read about. There was no evidence presented that any of the debt buyers used inaccurate information when collecting debts, no evidence that they have sued or threatened to sue anyone on time-barred debts, and no evidence regarding the validity of any dispute raised by any consumer. When you finish reading the Report, you may be tempted to ask yourself: "Where’s The Beef??"

No Evidence That Debt Buyers Use Inaccurate Information.

There is absolutely zero evidence contained in the Report that any debt buyer has purchased or used inaccurate data in the collection process. Indeed, the FTC expressly and repeatedly admits this at multiple places in the Report, making clear that it did not attempt to assess the accuracy of any of the data used by debt buyers. In the Introduction to the Report, for example, the FTC says: "Another limitation of the study is that the FTC did not directly assess the accuracy of the information that debt buyers used in collecting purchased debts or filing lawsuits on this debt." See Report at 2.

Later, when discussing the purchase and sale agreements that are largely drafted by debt sellers, the FTC concedes the point again, stating: "As noted above, contracts commonly stated that debts were sold ‘as is and with all faults.’ However, the fact that debts were generally sold ‘as is’ does not necessarily mean that errors or inaccuracies were or were not prevalent. The study did not test the accuracy of the information conveyed by debt sellers to debt buyers. Accordingly, the study does not permit any conclusions to be drawn as to the prevalence of errors or inaccuracies in debts generally sold ‘as is.’" Report at 25 (emphasis added).

When discussing the data that debt buyers receive from sellers, the FTC emphasized that the data provided absolutely no evidence that debt buyers obtained or used inaccurate information, stating: "The data the FTC obtained and analyzed, however, are subject to two important limitations. First, the data evaluated did not include information about debt collection litigation actions, and, therefore, the Commission can neither make findings nor offer conclusions as to the sufficiency and accuracy of information debt buyers have or offer in connection with matters in litigation. Second, the study did not directly evaluate the accuracy of the information that debt buyers obtained but instead focused on what types of information debt buyers obtained, as well as when and how they obtained it." Report at 34 (emphasis added).

In other words, even though the FTC spent three years analyzing debt buyer data from thousands of portfolios containing nearly 90 million consumer accounts, the FTC Report does not identify a single instance where a debt buyer purchased or used inaccurate data.

No Evidence That Debt Buyers Sue Or Threaten To Sue On Time-Barred Debt

Although the FTC repeated its concern that "consumers will be subject to a default judgment on a time-barred debt" the Report itself provides zero evidence that this has occurred. None of the data supplied by the debt buyers established that they had threatened to file suit or had actually filed suit on debts after the statute of limitations expired. In fact, the FTC never asked the debt buyers to provide information on this point. This is expressly conceded in the Report, which states: "The information the FTC received in response to its 6(b) orders did not permit the agency to assess how often debt buyers filed actions in court to recover on debts that were beyond the statute of limitations or the effect of such actions on consumers." Report at 46.

No Evidence Of The Validity Of Any Consumer Dispute

The report makes much of the fact that there is a 3.2% consumer dispute rate on debt buyer accounts, which translates into one million disputes per year. But the FTC did not perform any type of qualitative analysis of those disputes in order to determine whether they had any merit. Consumers who actually owe their debts may dispute them for a variety of reasons, including because they do not remember the account, they do not recognize the name of the debt buyer, they have ignored the power of compounding interest, or because the cannot pay or simply want to delay paying debts that they know they owe. Thus, although the Report tracks the dispute rate, it says nothing about whether any of the consumers do, or do not, owe the amount that the debt buyers were seeking to collect. And, as previously noted, the Report could not make this type of assessment, because it made no attempt to determine if the debt buyers’ data about what was owed was accurate or inaccurate.

The FTC Report actually includes a few passages that are helpful to debt buyers. For example, the FTC acknowledges the important role that debt collection plays in the economy, stating: "Like other contracts, credit contracts are of little value if the parties cannot enforce them. . . . Debt collection reduces the amounts that creditors lose from debts, both directly (by collecting on the debts) and indirectly (by making it more likely that consumers will incur debt only if they can and will repay it). By reducing the losses that creditors incur in providing credit, debt collection also allows creditors to provide more credit at lower prices – that is, at lower interest rates." Report at 11.

In addition, although media reports often emphasize that debt buyers pay "pennies on the dollar" for the accounts, suggesting they must make super-competitive profits, the Report points out the fallacy of this logic. The debt buyers paid on average 4 cents a dollar for the accounts that were analyzed for the Report, but the FTC noted these prices do not guarantee high profits, stating: "It is important to note, however, that although the price paid by debt buyers for debts is low relative to their face value, it does not necessarily follow that the profit from collecting on those debts will be high. First, debt buyers do not recover the face value of all of the debts that they purchase. Debt buyers typically do not attempt collections on all accounts they purchase, do not usually realize recoveries on every account for which collections are attempted, and do not typically recover the full face value on accounts for which they do realize recoveries. Second, debt buyers, like any other debt collectors, also incur substantial costs in collecting on debts." Report at 23.

The FTC Report should be read and understood in its proper context. It simply does not provide any evidence that any debt buyer has engaged in any improper collection practices.

Wednesday, December 12, 2012

Fighting FDCPA Class Actions: Challenging The Adequacy Of The Class Representative

The number of class actions filed against the credit and collection industry continues to rise, and FDCPA class actions remains a favorite among consumer attorneys.  Although it is easy for a consumer to file a class action, getting a class certified is no walk in the park.  The consumer bears the burden of proving that all of the requirements of Rule 23 of the Federal Rules of Civil Procedure have been satisfied, and this includes proving that they are an adequate class representative.  When faced with an FDCPA class action, collectors should not overlook potential challenges to the class representative.  An early and thorough assessment of the named plaintiff in an FDCPA class action could provide a key to your defense. 

 Before focusing on the adequacy requirement, here’s a brief overview of the standards governing class actions.  Remember that when a motion for class certification is filed, the consumer has the burden of proof.  The Court must deny the motion unless the consumer can provide evidence to satisfy all four elements of Rule 23(a) of the Federal Rules of Civil Procedure, and at least one of the subsections of Rule 23(b).  See Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 614 (1997).  The consumer has the burden of “affirmatively demonstrat[ing] compliance with the four prerequisites of Rule 23(a).”  Bennett v. Nucor Corp., 656 F.3d 802, 814 (8th Cir. 2011).  The consumer’s adequacy to serve as class representative is one of the four requirements of Rule 23(a).


Experienced consumer attorneys often have a standard motion for class certification that they use in every case.  But the court cannot simply rubber stamp a consumer’s motion and certify the class.  The Supreme Court has held that no class may be certified until the district court conducts a “rigorous analysis” of the evidence to determine if it supports each element of Rule 23.  See General Tel. Co. Of Southwest v. Falcon, 457 U.S. 147, 161 (1982) (reversing certification order: class action “may only be certified if the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied.”); see also Zinser v. Accufix Research Institute, Inc., 253 F.3d 1180, 1186 (9th Cir. 2001) (affirming denial of certification:  “Before certifying a class, the trial court must conduct a ‘rigorous analysis’ to determine whether the party seeking certification has met the prerequisites of Rule 23. (citation).”); Avritt v. Reliastar Life Ins. Co., 615 F.3d 1023, 1029 (8th Cir. 2010) (affirming denial of certification:  “In making its determination, the district court must undertake a ‘rigorous analysis’ that includes examination of what the parties would be required to prove at trial.”).


Consumer attorneys often argue that the merits of their claim should not be considered in the context of a motion for class certification.  But the Supreme Court has recognized that the “class determination generally involves considerations that are enmeshed in the factual and legal issues comprising the plaintiff’s cause of action,” and that “sometimes it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question.”  Falcon, 457 U.S. at 160 (citations omitted).  The Supreme Court recently reiterated this point, and emphasized that “Rule 23 does not set forth a mere pleading standard,” but rather, “[a] party seeking class certification must affirmatively demonstrate his compliance with the Rule – that is, he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc.”  Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2550-52 (2011) (citation omitted). 
 
With this background, let’s focus on the adequacy requirement more specifically.  What exactly does it take to be an adequate class representative?  Rule 23(a)(4) of the Federal Rules of Civil Procedure provides that a consumer must show “that the representative parties will fairly and adequately protect the interests of the class.”  What does this mean?  The Supreme Court has held that the adequacy analysis of Rule 23(a) “serves to uncover conflicts of interest between named parties and the class they seek to represent.” Amchem Prods., Inc., 521 U.S. at 625.  For this reason, a court should deny certification if the named class representative is subject to a unique defense that may distract from the litigation.  See Hanon v. DataProds. Corp., 976 F.2d 497, 508 (9th Cir. 1992) (denying class certification; “Hanon’s unique background and factual situation require him to prepare to meet defenses that are not typical of the defenses which may be raised against other members of the proposed class.”). 
 
Thus, collectors should seek to develop facts during discovery that show that the class representative may be subject to a unique defense.  See, e.g., Beck v. Maximus, Inc., 457 F.3d 291, 300 (3d Cir. 2006) (reversing order certifying FDCPA class; remanding to determine if class representative was adequate in light of potential bona fide error defense).

What about a consumer that cannot remember anything during their deposition?  Or a consumer with poor credibility?  They will not make a strong class representative.  Courts have denied certification in FDCPA actions where the class representative lacks credibility or has a bad memory.  See, e.g., Savino v. Computer Credit, Inc., 164 F.3d 81, 87 (2d Cir. 1998) (FDCPA class representative not credible: “The fact that Savino offered differing accounts about the letters that form the very basis for his lawsuit surely would create serious concerns as to his credibility at any trial.”); Dotson v. Portfolio Recovery Assocs., LLC, 2009 WL 1559813, **3-4 (E.D. Pa. June 3, 2009) (FDCPA plaintiff gave false testimony and had a bad memory: “Because plaintiff is unable to provide credible testimony, he cannot adequately protect the interests of absent members of the proposed class.”).

How about a consumer who does not know what claims she is pursuing and has no idea what is happening in the litigation?  She won’t make a good class representative either.  Courts have denied certification where the class representative is not familiar with the claims asserted, has not been actively involved in the litigation, or has delegated the entire case to their attorneys for handling. See, e.g., Levine v. Berg, 79 F.R.D. 95, 98 (S.D.N.Y. 1978) (“Plaintiff's deposition testimony reveals an alarming adversity to unearthing the facts relevant to her claim, as well as a total reliance on her counsel, to whom she ‘gave . . . the case and . . . figured whatever he had to do, he did.’”); Burkhalter Travel Agency v. MacFarms Int’l, Inc., 141 F.R.D. 144, 154 (N.D. Cal. 1991) (class representative could not identify defendants and was unfamiliar with scope of class he represented: “As plaintiff’s counsel would be acting on behalf of an essentially unknowledgeable client, certifying a class with Specialty as its representative would risk a denial of due process to the absent class members.”); Efros v. Nationwide Corp., 98 F.R.D. 703, 707-08 (S.D. Ohio 1983) (plaintiff gave “unfettered discretion” to her attorneys and her deposition revealed “glaring lack of familiarity with the facts of this litigation”); Lubin v. Sybedon Corp. 688 F. Supp. 1425, 1462 (S.D. Cal. 1988) (class representative’s unfamiliarity with case was “alarming” where he testified, inter alia, that “he had never read or seen either the original complaint or the amended complaint, that he did not even recognize the names of many of the defendants, [and] that he misunderstands the nature of the complaint’s fraud allegations”); Kelly v. Mid-America Racing Stables, Inc., 139 F.R.D. 405, 409 (W.D. Ok. 1990) (“these plaintiffs are inadequate representatives because of their almost total lack of familiarity with the facts of their case. Indeed, what the plaintiffs know appears to come entirely from their counsel.”).

In sum, do not assume that the consumer who has sued you can adequately represent the class.  Collectors faced with FDCPA class actions should conduct an early and continuing assessment of whether the case can meet all of the requirements of Rule 23.  During this process, they should not forget to develop evidence relating to the adequacy of the class representative.  Not everyone will qualify. 

 

           

Thursday, August 16, 2012

The CFPB's Plans For The Collection Industry


If you are a collection professional working for a creditor, debt buyer, collection agency or collection law firm, and you have not yet added the website for the Consumer Financial Protection Bureau (CFPB) to the favorites on your web browser, it is high time that you do so.  The CFPB has been publishing lots of information this year, and has laid out some details of how it plans to directly or indirectly regulate virtually all aspects of the collection industry.  This article is hardly comprehensive, but here are a few highlights.

On February 17, 2012, the CFPB published its Proposed Rule Defining Larger Participants in Certain Consumer Financial Product and Service Markets.  Entities in the debt collection market that generate $10 million in annual receipts from consumer collection activities would be deemed a “larger participant” in the market.  This “larger participant” designation would subject those entities to direct supervision by the CFPB.  The Bureau estimated that approximately 175 collection entities would qualify as “larger participant” under the Proposed Rule.  As of the date of this writing, the CFPB has not published a Final Rule relating to larger participants in the debt collection market.  If your company does not meet the $10 million “larger participant” threshold, however, you should not feel left out in the cold.  The CFPB has several other methods that it plans to employ to supervise or otherwise regulate members of the collection industry, and some of them are discussed below.

On March 20, 2012, the CFPB issued its first Annual Report to Congress on the Fair Debt Collection Practices Act.  In it, the CFPB explains that it now has primarily responsibility for administering the FDCPA, including rulemaking and supervisory authority, and that it now shares overall enforcement authority with the FTC and other federal agencies.  The CFPB emphasizes its belief that “consumer complaint data provides useful insight into the acts and practices of debt collectors” and that it will continue the FTC’s practice of gathering consumer complaints about members of the collection industry through its website, via telephone, mail, faxes and by referral from other agencies.

On April 13, 2012, the CFPB released its Bulletin 2012-03 relating to Service Providers.  In it, the CFPB explains its position that it not only has the power to supervise and examine banks and non-banks, but it also may supervise and examine “service providers” for those entities.  A “service provider” is any entity that “provides a material service to a covered person in connection with the offering or provision by that person of a consumer financial product or service.”  It therefore appears that the CFPB believes that it has the power to supervise and examine virtually any entity operating in the consumer collection industry.  In addition, the CFPB makes clear in the Bulletin that it expects all supervised banks and nonbanks to ensure that their service providers implement effective processes to comply with all statutes and regulations governing the collection process to avoid unwarranted risks to consumers.  Thus, the CFPB expects supervised entities to conduct due diligence on all service providers to ensure they understand and can comply with the laws, to review the compliance policies and procedures used by their service providers and their training and oversight practices, to include contractual provisions with service providers designed to ensure compliance, to establish monitoring processes designed to determine compliance by service providers, and to take prompt action, including termination, to address any problems identified by the monitoring process.

On May 25, 2012, the CFPB published its Proposed Procedural Rules to Establish Supervisory Authority Over Certain Nonbank Covered Persons Based on Risk Determination.  Here, the CFPB sets out the method by which it will supervise any nonbank covered person who the Bureau has reasonable cause to believe “is engaging, or has engaged, in conduct that poses risks to consumers” in connection with consumer financial products or services.  Generally speaking, the CFPB will serve the company with a notice explaining why it has reasonable cause to believe the company presents a risk to consumers.  If the company disagrees, it will have 20 days to file a written response under penalty of perjury explaining why it feels the CFPB is mistaken and why it should not be subject to supervision.  The response must be accompanied by all records and documents that support the company’s position.  The company may also make a request for the opportunity to supplement that response verbally.  In the alternative, the company can simply agree to consent to supervision by the CFPB.  It seems clear that the consumer complaints that the CFPB plans to compile concerning members of the collection industry will be the genesis for the CFPB’s determination of its “reasonable cause to believe” that an entity presents risks to consumers.

If you have been worried about how your attorney-client privileged documents are going to be handled when the CFPB has arrived, keep worrying.  On July 5, 2012, the CFPB issued its Final Rule on Confidential Treatment of Privileged Information.  In it, the CFPB makes clear that if it asks a supervised or regulated entity for documents or information – even if it “may be subject to one or more statutory or common law privileges, including the attorney-client privilege and attorney work product protection” – it will expect the documents and information to be produced.  The CFPB claims that you should not worry about this, however, because in its opinion, giving privileged documents and information to the CFPB will not result in a waiver of the attorney-client privilege.  It is unclear whether the CFPB is correct on this point, however, and legislation designed to clarify the issue has not been passed as of the date of this writing.  The CFPB also states that it will not “routinely” share the confidential information it gets from you with law enforcement agencies, including State Attorneys General, but that it reserves the right to do so in some circumstances.

It should be clear that debt collection will be a major focus of the CFPB now that the agency is up and running.  Collection professionals should watch for more CFPB rules, guidance, enforcement actions and other developments in the coming months.