Successful marketing leads to sales, but sometimes those sales don't result in customers making timely payments. When that happens merchants and lenders often try to recover the cost of goods sold or loans through collections. But what are the risk for merchants seeking to collect outstanding payments? A lot, apparently, if two recent Consumer Financial Protection Bureau ("CFPB") enforcement actions tell us anything. Although "first-party" collections are largely exempt from the Fair Debt Collections Practices Act ("FDCPA"), the CFPB has begun using its enforcement powers to challenge first-party collection practices, including those used by retail merchants and other lenders.
In CFPB v. Freedom Stores, Inc., the CFPB (and several states) alleged that a Virginia-based retailer that operates near military bases nationwide engaged in unfair and deceptive collection practices by filing illegal lawsuits in distant forums, debiting consumers' accounts without authorization, and contacting service members' commanding officers. To settle the allegations, Freedom Stores paid over $2.5 million in partial refunds to affected consumers. Similarly, in In re DriveTime, a "buy-here, pay-here" car dealer paid an $8 million penalty to settle allegations that the company engaged in various unlawful collection practices.
These actions demonstrate the need for first-party creditors to implement appropriate collection policies and procedures or else risk CFPB scrutiny. At a minimum, creditors should consider the following when engaging in collections:
- Develop a compliance management system ("CMS") that is integrated into the entity's framework for product design, delivery, and administration;
- Consider voluntarily following the requirements of the FDCPA;
- Implement a process for regular internal and external compliance audits to review operations for compliance with applicable legal requirements;
- Investigate consumer complaints related to its lending and collection practices and take prompt corrective action to address such complaints or any other indications of systemic weaknesses that pose a risk to consumers; and
- Monitor their business relationships with service providers to ensure compliance with federal financial and consumer protection laws.
Taking these steps can go a long way to protecting your business, especially if the CFPB comes around asking questions about your collection efforts.
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