Debt Collection Laws

QUESTION

I see that the CFPB has been busy with debt collection issues. We are a lender that also does some servicing. We have a few questions. First, who is considered a debt collector? Second, how does the CFPB get involved in handling debt collection problems? And, three, what are the laws that apply to debt collection?

ANSWER

Debt collection compliance should be fully understood and implemented by a variety of entities, including originating creditors, third-party collectors, debt buyers, and collection attorneys, engage in debt collection.

Here are the salient entities:

• Originating creditors attempting to obtain payment from the consumer, typically by sending letters and making telephone calls to convince the consumer to pay.
• Originating creditors that outsource the collection of debt to third-party collection agencies or attorneys or sell the debt to debt buyers after an account has been delinquent for a period of time.
• Third-party collection agencies collecting debt on behalf of originating creditors or other debt owners, often on a contingency fee basis.
• Debt buyers purchasing debt, either from the originating creditor or from another debt buyer, usually for a fraction of the balance owed.
• Debt buyers using third-party collection agencies or collection attorneys to collect their debt, or undertaking their own collection efforts.
• Debt buyers selling purchased debt to another debt buyer.

The CFPB is directly involved in the examination and enforcement of debt collection compliance. The Dodd-Frank Act (DFA) gave the CFPB supervisory authority over many types of institutions that may engage in debt collection, including certain depository institutions and their affiliates; nonbank entities in the residential mortgage, payday lending, and private education lending markets; and, of course, their service providers. The DFA also gave the CFPB supervisory authority over “larger participants” of markets for consumer debt collection, as the CFPB defines by rule, and their service providers. [12 U.S.C. 5514(a)(1)(B)]

On October 24, 2012, the CFPB issued a larger participant regulation in the market of consumer debt collection. The consumer debt collection larger participant rule, as appearing 12 CFR Part 1090, was effective January 2, 2013. It provides that a nonbank covered person is a larger participant of the consumer debt collection market if the person’s annual receipts resulting from consumer debt collection – as defined in the rule – are more than $10 million.

Concerning the laws related to debt collection, when supervised entities seek to collect debt from consumers, those entities must comply with various laws to the extent applicable, including: 

• The Fair Debt Collection Practices Act (FDCPA). The FDCPA governs collection activities and prohibits deceptive, unfair, and abusive collection practices. The FDCPA applies to entities that constitute “debt collectors” under the Act, which generally includes:

-Third parties such as collection agencies and collection attorneys collecting on behalf of lenders;

-Lenders collecting their own debts using an assumed name; and

-Collection agencies that acquire debt at a time when it is already in default.

Please note, the FDCPA applies to debts incurred or allegedly incurred primarily for the consumer’s personal, family or household purposes.

• The Fair Credit Reporting Act (FCRA). The FCRA and its implementing regulation, Regulation V, require that furnishers of information to consumer reporting agencies follow reasonable policies and procedures regarding the accuracy and integrity of data they place in the consumer reporting system. The FCRA and Regulation V require furnishers and consumer reporting agencies to handle disputes and impose other obligations on furnishers, consumer reporting agencies, and users of consumer reports. 
• The Gramm-Leach-Bliley Act (GLBA). The GLBA and its implementing regulation, Regulation P, impose limitations on when financial institutions can share nonpublic personal information with third parties. They also require under certain circumstances that financial institutions disclose their privacy policies and permit customers to opt out of certain sharing practices with unaffiliated entities. 
• The Electronic Fund Transfer Act (EFTA). The EFTA and its implementing regulation, Regulation E, impose requirements if an institution within the statute’s scope of coverage obtains electronic payments from a consumer. 
• The Equal Credit Opportunity Act (ECOA). The ECOA and its implementing regulation, Regulation B, apply to all creditors and prohibit discrimination in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to contract), receipt of public assistance income, or exercise in good faith of any right under the Consumer Credit Protection Act. [12 CFR 1002.2(z), 1002.4(a)] Credit transactions encompass “every aspect of an applicant’s dealings with a creditor regarding an application for credit or an existing extension of credit,” and include “revocation, alteration, or termination of credit” and “collection procedures.” [12 CFR 1002.2(m)]

You should recognize that there are other risks to consumers. These risks may include potentially unfair, deceptive, or abusive acts or practices (UDAAPs). In this regard, it is critical to conduct a risk assessment and review applicable procedures regarding UDAAPs in order to ensure conformance with (1) the CFPB’s legal standards, and (2) the CFPB’s approach to examining for UDAAPs. This is a particularly complicated area of regulatory compliance. The specific facts and circumstances in a case are crucial to the determination of UDAAPs. 

Jonathan Foxx Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group