On July 28, 2016, the Consumer Financial Protection Bureau ("CFPB") released an outline of proposals that it is considering to, in Director Richard Cordray's words, "drastically overhaul the debt collection market" (the "Proposals"). The CFPB is unveiling key provisions of the Proposals for presentation to a Small Business Regulatory Enforcement Fairness Act ("SBREFA") panel, a crucial step toward publication of a proposed rule. The Proposals are limited to third party debt collectors, debt buyers and others ("collectors") subject to the Fair Debt Collection Practices Act (the "FDCPA"). The CFPB warns, however, that it plans to address issues involving first-party debt collectors and creditors on a separate track as part of its overhaul of the debt collection marketplace. Moreover, the Proposals' demand for collectors to conduct extensive substantiation and documentation of debt at multiple steps in the collection process would translate to corresponding demands and costs in transactions between creditors, debt buyers and collectors as well.
Indeed, we already have seen a preview in the CFPB's enforcement actions - often alleging unfair, deceptive or abusive acts and practices ("UDAAPs") - against creditors, debt buyers, and collectors, through which it has pushed for verification of the accuracy of account information before a debt is placed with a collector or sold, mandates for disclosure if a debt is beyond the statute of limitations, and increased steps to substantiate account data before filing a collections suit. The Proposals would incorporate even more extensive mandates of the same kind into industry rules, add enhanced disclosures and processes for consumers to dispute the debt, and impose limits on consumer contacts.
Key provisions of the Proposals would require collectors to:
- Substantiate a debt, including obtaining a representation from the current owner of the debt that the account information is accurate;
- Provide an enhanced validation notice and statement of rights to debtors, notifying them that they have the right to dispute a debt and that a collector cannot sue on a debt that is outside the statute of limitations; and provide a "tear off" form that consumers can fill out and return to either pay or dispute a debt (although consumers also can dispute the debt verbally at any time);
- If a consumer disputes a debt, cease collection until the collector has checked the necessary documentation and, if the consumer sends the tear-off sheet or any written notice within 30 days of the initial collection notice, give the consumer a written debt report substantiating the debt;
- Continually monitor portfolios after commencing collection efforts and stop collections until it has resolved "warning signs" of inaccuracy, such as a high percentage of consumers disputing their debts or the inability to obtain documentation or data after a consumer disputes a debt;
- Obtain "reasonable support" of claims that a consumer owes a debt before filing suit, and provide a specific disclosure of the collector's intent to sue.
In addition, collectors would have to limit communications with debtors, including:
- In instances where a collector does not have confirmed contact with a debtor, making no more than six attempts at contact per week;
- If a collector does have confirmed contact with a debtor, making no more than three attempts at contact per week (and only engaging in one live communication with the debtor per week);
- Not engaging in any third party contacts if the collector has confirmed contact with the debtor; and
- Not communicating with a debtor through a work e-mail address without consent, nor through other means to which the debtor objects.
Focusing on the transfer of debts, the Proposals also would (1) prohibit successor collectors from collecting a debt that is in dispute, and (2) outline information that collectors would have to share when they transfer the debts so that debtors would not have to resubmit their information.
The CFPB is still at a fairly early stage of the rulemaking process. It must consider the report that will be prepared by the SBREFA panel before drafting and publishing a proposed rule for notice and comment. Any proposed rule is likely still several months from publication. For comparison, the CFPB convened a SBREFA panel to consider its arbitration proposals in October 2015, but did not publish its proposed arbitration rule until May 2016. Moreover, given the large number of comments the CFPB received after publishing its advance notice of proposed rulemaking on debt collection in November 2013, it is likely to receive a high volume of comments on any proposed rule, which it will have to review prior to publishing a final rule.
To influence the course of this rulemaking, both collectors and creditors should review their operations, including their policies and procedures for substantiating the accuracy of account information and responding to consumer disputes and complaints, and document the efficiencies of the current framework as well as the demands of compliance with the CFPB's Proposals. Such a review will facilitate identification of the areas where they should focus their advocacy for changes to the Proposals. Creditors and collectors also should assess the economic impact of the Proposals and the policy changes they may implement if the Proposals are adopted, for the purpose of data gathering for the rulemaking. For example, the CFPB's proposals to limit the number of allowed communications with debtors may prompt collectors to file suit regarding delinquent debt more quickly than they do now, contrary to the CFPB's stated goal of reducing collections litigation. If so, data or studies documenting the increased likelihood of litigation regarding certain debts may cause the CFPB to reconsider its Proposals or, if it does not reconsider, demonstrate the flaws in its cost-benefit analysis. Such analysis and data-gathering will be crucial both to make industry's case in the rulemaking and to facilitate development of an efficient and effective compliance strategy.
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