Legal Update August 5, 2016 A Debt Collection Overhaul Is Upon Us: The CFPB’s Proposals Offer a Sign of What’s to Come Nearly three years after releasing its Advance Notice of Proposed Rulemaking (ANPR) on debt collection practices, the Consumer Financial Protection Bureau (the “CFPB” or “Bureau”) has finally offered some insight on its plans for issuing rules under the Fair Debt Collection Practices Act (FDCPA). On July 28, 2016, the CFPB released an outline (the “Proposed Outline”)1 of proposals that it is considering in preparation for the next step in the rulemaking process—convening a Small Business Review Panel. Ultimately, the CFPB will issue proposed regulations with an official notice-and-comment period. Until then, the Proposed Outline and accompanying study on third-party debt collection operations2 provide the best guidance on the types of regulations that the CFPB is likely to issue. In releasing the Proposed Outline, the CFPB surprisingly announced that it will not address first-party debt collectors and creditors at this time but will address those parties on “a separate track.” CFPB-regulated first-party debt collectors remain subject to the prohibition on collections-related unfair, deceptive and abusive acts and practices (UDAAPs), including those described in CFPB Bulletin 2013-07.3 The Proposed Outline would require significant changes to how industry participants collect on, buy, sell and place debts and would have a significant impact on how consumers interact with debt collectors. All collection industry participants should consider how these proposals would impact the debt collection market and affect consumers and should provide feedback to the CFPB accordingly. In this Legal Update, we describe the proposals under consideration, particularly in light of past CFPB enforcement actions and guidance. For ease of understanding, we have categorized the CFPB’s proposals as follows: substantiating debts; debt buying, selling, and placement; disclosures; communications with consumers; specific prohibited practices; and other. A. Substantiating Debts The CFPB is considering a number of proposals to help ensure that debt collectors have a reasonable basis for claims that the consumer owes the debt. These proposals come after numerous consumer complaints and enforcement actions alleging collection of “phantom debts”4 or inaccurate debts.5 Reasonable basis for the claim and warning signs: The Bureau is considering proposals to specify how debt collectors can obtain reasonable support for making collection attempts, including outlining elements that a collector should obtain and review before collecting on a debt. The CFPB is considering the following list of “fundamental information” needed to substantiate the claims of indebtedness and to review for warning signs: • The full name, last-known address and lastknown telephone number of the consumer; 2 Mayer Brown | A Debt Collection Overhaul Is Upon Us: The CFPB’s Proposals Offer a Sign of What’s to Come • The account number of the consumer with the debt owner at the time the account went into default; • The date of default, the amount owed at default and the date and amount of any payment or credit applied after default; • Each charge for interest or fees imposed after default and the contractual or statutory source for such interest or fees; and • The complete chain of title from the debt owner at the time of default to the collector. In addition to the “fundamental information,” the CFPB is considering outlining a list of warning signs that must be reviewed indicating that information about the debt may be inaccurate or incomplete, including warning signs that appear on an individual account or across an entire portfolio (e.g., unresolved disputes, missing or implausible information and information about a debt that is not in a clearly understandable form). The CFPB is also considering requiring debt collectors to review for warning signs throughout the collection process, as opposed to just upon transfer. This type of information may be difficult to obtain and verify, particularly for aged debts. Disputes: The CFPB is considering imposing a dispute resolution process for consumers who timely dispute debts upon receipt of a validation-of-debt notice. The process would prohibit debt collectors from attempting to collect on the debt upon receipt of the dispute. The CFPB is considering four categories of disputes to be included in a “tear-off” sheet as part of the debt validation notice: generic, wrong amount, wrong consumer and wrong collector. The collector would have to possess certain documentation, not just information, to respond to disputes in each category. The full list of documentation under consideration is in Appendix D of the Proposed Outline. The CFPB is considering procedures to address duplicative disputes. The Bureau is also considering requirements for oral disputes received within 30 days of the validation-of-debt notice. The Proposed Outline does not contain any information about exceptions for frivolous disputes or disputes that contain insufficient information in order to respond though the CFPB did request comments on these types of exceptions as part of the ANPR. Substantiating debts in litigation: The CFPB is considering requiring collectors to substantiate debts prior to including them in a complaint filed in litigation. This proposal is in response to the CFPB’s concern about the potentially harmful consequences of litigation on consumers. In particular, the CFPB is considering requiring collectors to review the list of “fundamental information” before filing the complaint. B. Debt Buying, Selling and Placement The CFPB is considering a number of proposals regarding the transfer of debts between owners and collectors. These appear to be some of the more onerous proposals under consideration, and debt buyers and owners alike should consider these proposals carefully, particularly in light of recent CFPB enforcement actions prohibiting certain institutions from allowing their debt buyers to subsequently resell debts.6 These proposals may also be informed by the CFPB’s study on debt collection operations, which suggests that many collection firms do not face audits by their clients. Data transfer requirements: As part of the efforts to substantiate debts as described in Section A above, the CFPB is considering requiring that collectors obtain the list of “fundamental information” from the debt owner before collecting on the debt. The Bureau is considering a proposal that would allow a collector to obtain a written representation from the owner that the owner has adopted appropriate policies and procedures regarding the accuracy of the transferred information and that the information is identical to the owner’s records. The CFPB has indicated that it is 3 Mayer Brown | A Debt Collection Overhaul Is Upon Us: The CFPB’s Proposals Offer a Sign of What’s to Come considering this proposal as opposed to requiring debt collectors to obtain and review original copies of account-level documents. The CFPB is also considering requiring subsequent collectors to obtain and review a number of items related to past collection activity. These items include: • Information regarding FDCPA compliance (e.g., dispute information, inconvenient communication notations, employer communication prohibitions, contact information confirmations, time-barred debt disclosure information and the date of the consumer’s death, if applicable); • Data elements for compliance with other applicable laws, such as the Servicemembers Civil Relief Act, bankruptcy protections and debt collection litigation; and • Other “beneficial” information, such as the consumer’s language preference and whether the consumer has submitted a cease communication request. The full list of data elements under consideration is listed in Appendix E of the Proposed Outline. In the Proposed Outline, the CFPB indicated that it does not believe that the proposals would create new obligations for mortgage servicers because they are already subject to detailed data transfer requirements under the mortgage servicing rules. Depository institutions should consider how these proposals compare to banking regulatory guidance on debt sales, which already require banks to provide comprehensive account information about debts at the time of sale, including information about all unresolved disputes and fraud claims made by the debtor and collection efforts.7 Ongoing obligation to forward certain information: The CFPB is considering requirements for entities who have already transferred debts to forward certain information to the subsequent collector, such as payments, bankruptcy discharge notices, identity theft reports, disputes and any assertion or implication by the consumer that his or her income and assets are exempt under federal or state laws from a judgment creditor seeking garnishment. Prohibition on transferring debt to certain entities: The CFPB is considering prohibiting the sale of debt to or placement of debt with: • Those subject to a judgment, order or similar restriction prohibiting them from purchasing or collecting debt in the state in which the consumer resides; and • Those that lack any license required to purchase or collect debt, as applicable, in the state in which the consumer resides. This prohibition, if adopted, would require those that sell or place debt to be extremely knowledgeable of state requirements and perform 50-state due diligence on subsequent collectors. Prohibition on transferring debt in certain circumstances: The Bureau is considering prohibiting the sale or placement of debt where the debt buyer (emphasis added) knows or should know that the debt was paid or settled, discharged in bankruptcy or the result of identity theft. C. Disclosures The CFPB is considering requiring a number of disclosures in connection with the transfer and/or collection of debts: Enhanced validation-of-debt disclosure: The CFPB’s consumer studies and analysis of complaints has prompted the CFPB to consider proposals to enhance the current validation-of-debt notice requirements to better inform consumers of the debt and the consumer’s rights under the FDCPA. In particular, the CFPB is considering requiring more information to be provided about the debt, including a description of the debt, the amount owed on the date of default and an itemization of interest, fees, payments and 4 Mayer Brown | A Debt Collection Overhaul Is Upon Us: The CFPB’s Proposals Offer a Sign of What’s to Come credits since the default date. The CFPB is also considering requiring more information about consumer rights, including dispute information. Finally, as described in the disputes section above, the CFPB is considering a proposal to require a “tear-off” section for disputes. The full list of items proposed to be contained in the validation-ofdebt notice and a sample notice are in Appendix F of the Proposed Outline. Statement of Rights: The CFPB is also considering requiring collectors to provide a one-page “Statement of Rights” along with the validation notice. This would include the consumer’s rights under the FDCPA and the right to receive a credit report under the Fair Credit Reporting Act. The full list of items to be contained in the Statement of Rights and a sample are in Appendix G of the Proposed Outline. The CFPB is also considering requiring collectors to re-send the Statement of Rights in the first communication made to the consumer more than 180 days after receiving the initial validation-of-debt notice and Statement of Rights. The CFPB is considering various options for both the validation-of-debt notice and the Statement of Rights to be provided in languages other than English. Litigation disclosure: In connection with communications to consumers regarding the collector’s intent to sue the consumer, the CFPB is proposing a “litigation disclosure” that would include information about the collector’s intent to sue, the potential consequences if the consumer does not defend the suit and contact information about legal services programs via the CFPB website and toll-free telephone number. This proposal appears to be in response to concerns that consumers do not defend debt collection lawsuits. Time-barred debt disclosure: The Bureau is considering proposals that would require collectors to provide a disclosure when they try to collect time-barred debt. The disclosure would explain that the collector cannot sue on time-barred debt, and it would be included in the validation-of-debt notice and first oral communication requesting payment. The CFPB is also considering whether to require this notice during additional points in the collection process. Obsolescence disclosure: In response to concerns about consumers not understanding the credit reporting impact of time-barred debt, the CFPB is considering a proposal to require collectors to inform consumers whether a timebarred debt can or cannot appear on a credit report. The CFPB is considering developing and testing possible disclosure content. Disclosure regarding consumer consents: The Bureau is considering an explicit disclosure, either orally or in writing, explaining when a consumer is deemed to have consented to certain items (e.g., receiving communications at a specific date and time). The CFPB is also considering whether to require collectors to document this consent in some manner, either by recording the call, notating a file or documenting a writing. Note that this appears to be the type of information that the CFPB would require to be transmitted to a subsequent collector. D. Communications with Consumers The CFPB is considering a number of communications-related restrictions in connection with debt collection. Many of these options have been mentioned in various debt collection enforcement actions and supervisory guidance in connection with the prohibition on UDAAP and the FDCPA’s restrictions on harassment. Notably, the Proposed Outline does not contain any proposals regarding in-person debt collection despite the CFPB’s recent guidance on that subject.8 When reviewing these proposals, debt collectors should consider the cost and logistics of operationalizing the proposals, including the impact on systems, particularly in light of the data transfer requirements described above. 5 Mayer Brown | A Debt Collection Overhaul Is Upon Us: The CFPB’s Proposals Offer a Sign of What’s to Come Limited content voicemails and other messages: The CFPB is considering a proposal that would clarify the information that a debt collector can leave for a consumer without disclosing the debt and triggering additional FDCPA disclosures. In particular, the CFPB is considering allowing collectors to leave voicemails or other messages with the individual debt collector’s name, the consumer’s name and a toll-free method by which the consumer can reply to the message. This proposal would provide clarity about what a collector is allowed to say in these contexts. Limiting contact frequency: The CFPB is considering options to significantly limit contact frequency to six total contact attempts per week (three per unique address or phone number) if the collector does not have confirmed consumer contact and to three total contact attempts per week (two per unique address or phone number) if the collector has confirmed consumer contact. The CFPB is considering limiting live conversations to one per week when confirmed contact exists. The CFPB expects the cap to apply on a per-account, rather than a perconsumer, basis. The Proposed Outline indicates that the limited content messages described above would also count toward the cap. The CFPB is still considering whether various types of communication (e.g., text, phone, email) would count toward the cap. The CFPB’s study on debt collection operations indicates that many debt collectors with small clients do not have contact frequency caps. Third-party contact: The CFPB is considering weekly caps on contact attempts to obtain location information from third parties. If the collector has already confirmed consumer contact, then it would be prohibited from contacting third parties. If the collector does not have confirmed consumer contact, it would be limited to three attempts per unique address or phone number per third party and six attempts per third party, with no limit on total contact attempts across all third parties. However, collectors would be limited to one live communication per third party total, not weekly (emphasis added). Inconvenient times: The CFPB is considering specifying how a debt collector should determine the consumer’s location if the collector has conflicting information (e.g., multiple phone numbers with various area codes). The CFPB is considering a proposal to limit communications to a time that would be convenient based on all location information on an account, rather than based on each piece of information. Inconvenient locations: The Bureau is considering outlining locations for contacting consumers that would be “presumptively inconvenient” and thereby prohibited, such as medical facilities, places of worship, places of burial or grieving and day care or child care facilities. This prohibition would apply if the collector knew or should have known that the consumer is in one of these locations. It is unclear how collectors would operationalize this prohibition, particularly given consumers’ mobility. The CFPB is also seeking feedback on how to best inform servicemembers of debts when in a combat zone or similar place. Communication methods: The CFPB is considering proposals to limit communications with consumers using a channel that the collector knows or should know is inconvenient. The CFPB is considering prohibiting collectors from using consumers’ workplace email addresses for debt collection communications. This proposal is rooted in the Bureau’s concern about disclosing debts to third parties and the particular sensitivities of consumers’ employers becoming aware of employees’ debts. Consumer consent: Many of the FDCPA’s existing restrictions on communications can be waived by consumer consent. In addition to the consumer consent disclosure described in Section C above, the Bureau is considering requiring collectors to obtain consent directly from consumers, either orally or in writing, 6 Mayer Brown | A Debt Collection Overhaul Is Upon Us: The CFPB’s Proposals Offer a Sign of What’s to Come including for debts renewed after a placement or sale. The CFPB also seeks input on how to allow consumers to revoke their consent. E. Specific Prohibited Practices The CFPB is considering a number of proposals to make certain practices a violation of the FDCPA. The CFPB and FTC have already used their UDAAP/UDAP authority to try to limit these types of acts. If the proposals are adopted, the following practices would be illegal under the FDCPA. Phone number display: The CFPB is considering requiring debt collectors to display a working toll-free telephone number to appear on a consumer’s caller ID when placing an outbound call. One challenge with this proposal is circumstances where the collector transmits a working telephone number, but the consumer’s local telephone operating company does not transmit the same number to the consumer’s caller ID. The CFPB is also considering similar measures for other communications, such as requiring collectors to display a working toll-free telephone number in the body of email communications. The CFPB has historically argued that the practice of transmitting a fake telephone number is a deceptive practice.9 Unavoidable charges for communications: The outline contains a proposal to limit collectors from using communications in a manner that results in charges to consumers and third parties, absent the party’s consent (e.g., text messages). False, misleading or unsubstantiated claims: The CFPB is considering proposals to clarify that the following are considered prohibited false, misleading or unsubstantiated claims: • That a person (e.g., a surviving spouse of a decedent in many circumstances) is responsible for a consumer’s debts; • The consequences for consumers of paying or not paying debts (e.g., a military servicemember having his or her security clearance revoked); and • Claims relating to the debt collector’s location or identity (e.g., a debt collector pretending to be located in the same city or town as the consumer). Debt collector identifying information: The FDCPA currently limits debt collectors from revealing to third parties that the communication is related to collection of the consumer’s debt (e.g., postcard restrictions). The CFPB is considering proposals to adopt these restrictions for specific technologies, such as emails (imposing limitations on information that can be contained in the “From” and “Subject” lines). Fees: The CFPB is considering explicit proposals to limit certain incidental fees, such as pay-by-phone fees, unless state law expressly permits them or the consumer expressly agreed to them in the contract that created the underlying debt and state law neither expressly permits nor prohibits such fees. Indirect fees, such as those received by the debt collector through a fee-splitting arrangement, would also be restricted to those circumstances. This proposal appears to be consistent with the CFPB’s approach regarding convenience fees in its supervisory examinations.10 F. Other Credit reporting requirements: The CFPB is considering prohibiting debt collectors from reporting information about a debt to a consumer reporting agency unless the debt collector has communicated directly to a consumer about the debt (e.g., through a validation notice). This proposal is in response to the CFPB’s concern about collectors that engage in “passive collection” and fail to attempt to reach consumers about their debts. Time-barred debt: The CFPB is considering prohibiting lawsuits and threats of suits on timebarred debt. It is also considering a proposal to 7 Mayer Brown | A Debt Collection Overhaul Is Upon Us: The CFPB’s Proposals Offer a Sign of What’s to Come prohibit a subsequent collector from suing on a debt where a prior collector provided a timebarred debt disclosure. Finally, the CFPB is considering prohibiting collectors from collecting on time-barred debt that can be revived under state law unless the collector waives its right to sue on time-barred debts. Notably, the CFPB has considered and at this juncture rejected options to ban either the sale or the collection of time-barred debt. Decedent debts: The CFPB is considering the following proposals regarding decedent debt: • Enabling collectors to communicate with surviving spouses, parents of deceased minor consumers and personal representatives of deceased consumers’ estates; and • Implementing a waiting period that would prohibit debt collectors from communicating within 30 days of the consumer’s death, absent consent. Recordkeeping: The CFPB is considering implementing a three-year records retention period for actions taken to begin upon the last communication or attempted communication with the consumer. The CFPB proposes that this requirement include recorded telephone calls, to the extent that calls are recorded. Conclusion Though it is hard to predict when the CFPB will issue a proposed rule after convening the Small Business Review Panel, industry participants should carefully review the Proposed Outline and consider the proposals’ impact on the ability to buy, sell, and place debt and to effectively collect on debts and their potential adverse impacts to consumers. Creditors and debt collectors should also continue to monitor consumer complaints, state and federal enforcement actions and CFPB guidance as these may further influence the ultimate proposed rule. For more information about the topics raised in this Legal Update, please contact any of the following lawyers. Steven M. Kaplan +1 202 263 3005 firstname.lastname@example.org Ori Lev +1 202 263 3270 email@example.com Anjali Garg +1 202 263 3419 firstname.lastname@example.org Endnotes 1 Consumer Financial Protection Bureau, Small Business Review Panel for Debt Collector and Debt Buyer Rulemaking, Outline of Proposals Under Consideration and Alternatives Considered (July 28, 2016), available at http://files.consumerfinance.gov/f/documents/20160727_ cfpb_Outline_of_proposals.pdf. 2 Consumer Financial Protection Bureau, Study of Third-Party Debt Collection Operations (July 2016), available at http://files.consumerfinance.gov/f/documents/20160727_cf pb_Third_Party_Debt_Collection_Operations_Study.pdf. 3 Consumer Financial Protection Bureau, Bulletin 2013-07: Prohibition of Unfair, Deceptive, or Abusive Acts or Practices in the Collection of Consumer Debts (July 10, 2013), available at http://files.consumerfinance.gov/f/201307_cfpb_bulletin_ unfair-deceptive-abusive-practices.pdf. 4 See, e.g., Complaint, Consumer Financial Protection Bureau v. Universal Debt & Payment Solutions et al., No. 1:15-C V-0859 (Mar. 26, 2015). 5 See, e.g., In the Matter of: Encore Capital Group, Inc., Midland Funding, LLC, Midland Credit Management, Inc. and Asset Acceptance Capital Corp., File No. 2015-CFPB- 0022 (Sept. 9, 2015). 6 See, e.g., In the Matter of Citibank, N.A., No. 2016-CFPB- 0003 (Feb. 23, 2016). 7 See, e.g., Office of the Comptroller of the Currency, OCC Bulletin 2014-37: Consumer Debt Sales (Aug. 4, 2014). 8 Consumer Financial Protection Bureau, Bulletin 2015-07, In-Person Collection of Consumer Debt (Dec. 16, 2015), available at http://files.consumerfinance.gov/f/201512_cfpb_complian ce-bulletin-in-person-collection-of-consumer-debt.pdf. See also, In the Matter of: EZCORP, Inc., File No. 2015-CFPB 0031 (Dec. 16, 2015). 8 Mayer Brown | A Debt Collection Overhaul Is Upon Us: The CFPB’s Proposals Offer a Sign of What’s to Come 9 See, e.g., In the Matter of: Westlake Services, LLC, also doing business as Westlake Financial Services, LLC, and Wilshire Consumer Credit, LLC, also doing business as Wilshire Commercial Capital, LLC, No. 2015-CFPB-0026 (Sept. 30, 2015). 10 Consumer Financial Protection Bureau, Supervisory Highlights (Fall 2015), available at http://files.consumerfinance.gov/f/201510_cfpb_superviso ry-highlights.pdf. Mayer Brown is a global legal services organization advising many of the world’s largest companies, including a significant proportion of the Fortune 100, FTSE 100, CAC 40, DAX, Hang Seng and Nikkei index companies and more than half of the world’s largest banks. 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