The Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) have signaled that financial institutions and debt collectors alike will face enhanced scrutiny regarding collection practices related to consumer debts.
Financial institutions, as lenders, deal with collecting overdue debts on a regular basis. Lenders may attempt to collect these debts themselves, engage a third party collector or attorney to collect the debts for them, or sell the debts to third parties. Recent regulatory guidance indicates that regardless of which avenue a financial institution chooses, it needs to take steps to ensure that its consumer borrowers are treated fairly and in compliance with applicable laws during the collection process.
The most notable federal law governing debt collection is the Fair Debt Collection Practices Act (FDCPA), which makes it illegal for parties collecting debts on behalf of others to harass, oppress or abuse borrowers, use false, deceptive or misleading representations in the debt collection process, or use unfair or unconscionable means to collect a debt. The FDCPA generally does not, by its language, apply to parties collecting their own debts.
However, in two bulletins released on July 10, 2013, the CFPB has indicated that it expects financial institutions collecting their own debts to adhere to many of the standards set forth in the FDCPA because failure to do so may constitute an unfair, deceptive or abusive act or practice (UDAAP) violation under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
CFPB Bulletin 2013-07 includes examples of debt collection practices that may constitute UDAAP violations, such as collecting amounts not expressly authorized by the agreement creating the debt or otherwise permitted by law, taking possession of property without the legal right to do so, misrepresenting whether information about a payment or nonpayment would be furnished to a credit reporting agency, and threatening an action that is not intended or authorized.
CFPB Bulletin 2013-08 more specifically addresses representations made to borrowers regarding the effect of debt payments on credit reports, credit scores and creditworthiness. For example, if a debt is too old to be included on a credit report, the CFPB warns that it is potentially deceptive to tell a debtor that making a payment on the obsolete debt will result in information about the debt being removed from the debtor’s credit report.
As this article went to print, the CFPB had just released an Advance Notice of Proposed Rulemaking seeking comment from the public about debt collection practices to assist the CFPB “in developing proposed rules for debt collection.”
Separately, the OCC released a statement on July 17, 2013 entitled, “Shining a Light on the Consumer Debt Industry” (Statement), in which it emphasized the need for national banks and federal savings banks to collect debts not only in a safe and sound manner, but also in a fair manner. The Statement discusses the legal, reputational and operational risks associated with debt collection activities, whether a bank opts to attempt to collect the debt directly, engages a third party to collect the debt on its behalf, or sells the debt for a partial recovery. “The OCC expects all national banks and federal savings associations to have policies and procedures in place to manage their debt collection activities effectively.”
While the Statement pays special attention to debt sales and indicates the OCC is developing guidance on this topic (which had not yet been released at the time this article went to print), the OCC’s Statement, taken together with the CFPB’s recent actions, indicates that bank regulators in general are taking a closer look at how financial institutions treat consumers when collecting past due debts. Financial institutions collecting debts directly may also be held to the legal requirements, such as the FDCPA, traditionally only applicable to third party collectors.
Now is a good time to review your bank’s debt collection practices to reaffirm that consumer debtors are being treated fairly and that such practices conform to regulator expectations.