Federal regulators—aggressively wielding their authority under Section 5 of the Federal Trade Commission Act to curb unfair or deceptive practices—may be creating new substantive compliance obligations for the consumer financial services industry even before the Bureau of Consumer Financial Protection begins rulemaking.

The most recent example of this is the FTC’s announcement on October 21, 2010, that it had settled charges that Allied Interstate, Inc., one of the nation’s largest debt collectors, had violated the Fair Debt Collection Practices Act and Section 5. The charges included claims that after consumers told the company in initial telephone calls that they did not owe the debt, Allied had acted wrongfully by continuing collection efforts without verifying the accuracy of the disputed information.

The consent decree requires Allied to pay a civil penalty of $1.75 million. It further provides that if a consumer disputes a debt during a telephone call and Allied is unable to resolve the dispute, Allied can make no further attempt to collect the debt or report it to a consumer reporting agency until it has completed an investigation and reasonably concluded that the information is accurate and complete.

Under the FDCPA, a debt collector is required to send a validation notice within five days of the initial communication. That notice must state that, if the consumer disputes the debt in writing, the debt collector will obtain verification of the debt and mail a copy of the verification to the consumer. A debt collector is required under the FDCPA to cease collection efforts pending verification if the consumer has disputed the debt in writing.

Thus, under the FDCPA, an oral notice does not require the debt collector to obtain verification of the debt or cease collection efforts. Nevertheless, as a result of the FTC’s use of Section 5, Allied must obtain verification and cease collection efforts based on a consumer’s oral dispute of a debt.

Another recent example of a federal regulator using its Section 5 authority to create substantive compliance obligations is the Office of the Comptroller of the Currency’s settlement of its enforcement action against Woodforest National Bank. The settlement, which was discussed in an earlier Ballard Spahr legal alert, resulted in the OCC’s imposition of substantive fee limits on Woodforest’s overdraft program.