Friday, July 23, 2010

An Overview Of The Consumer Financial Protection Act of 2010 For Debt Collectors

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. This statute undoubtedly marks a sea change for debt collectors. In particular, as described further in this article, Title 10 to the Dodd-Frank Act, known as the “Consumer Financial Protection Act of 2010” (the “CFPA”), has the potential to effectuate sweeping changes across many aspects of the collection industry.

You can read and download the text of the entire Dodd-Frank Act here:

Dodd-Frank Wall Street Reform And Consumer Protection Act -

The Act establishes a Bureau of Consumer Financial Protection (the “Bureau”) that will assume broad regulatory powers over debt collectors and virtually all other “covered persons” who have any connection to consumer financial products or services. The Bureau will have exclusive rule-making authority with respect to all significant federal statutes that impact the collection industry, including the Fair Debt Collection Practices Act (“FDCPA”), the Fair Credit Reporting Act (“FCRA”) and others. This means, for example, that the Bureau will have the ability to pass rules and regulations that interpret any of the provisions of the FDCPA, potentially impacting all facets of the collection channel.

At this time, it is not possible or practical to attempt to provide a comprehensive analysis of how the CFPA will impact debt collectors. The full extent of that impact probably will not be known for a year or more, when the Bureau begins to implement regulations. This article is designed to summarize key portions of the statute and to provide collectors with a broad overview of how the CFPA may change the landscape.

Section 1002 – Definitions

If any debt collectors are still holding out hope that the CFPA would not apply to them, they will probably be disappointed. Unless a collector manages to obtain an exemption from the Bureau, it will likely be subject to the CFPA. A “covered person” under the CFPA includes “any person that engages in offering or providing a consumer financial product or service,” as well as any “affiliate” of that person “if such affiliate acts as a service provider to such person.” Later in the Act, the term “consumer financial product or service” is defined very broadly, to include anyone who is “collecting debt relating to any consumer financial product or service.” A “financial product or service” includes not only “extending credit and servicing loans,” but also “acquiring, purchasing, selling, brokering, or other extensions of credit (other than solely extending commercial credit to a person who originates consumer credit transactions).”

The CFPA also defines “service providers” to include “any person that provides a material service to a covered person in connection with the offering or provision of such covered person of a consumer financial product or service,” including person who “processes transactions relating to the consumer financial product or service.”

Thus, if you are a debt collector, or even a “service provider” for a debt collector, you are likely subject to the CFPA.

Section 1021 – Purpose, Objectives, and Functions

Not surprisingly, the CFPA espouses strong consumer protection objectives. The purpose of the Bureau is to “implement and, where applicable, enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive.”

Certain of the Bureau’s stated objectives (items 3 and 4, below) could benefit the collection industry. The CFPA lists the objectives of the Bureau as ensuring that “(1) consumers are provided with timely and understandable information to make responsible decisions about financial transactions; (2) consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination; (3) outdated, unnecessary, or unduly burdensome regulations are regularly identified and addressed in order to reduce unwarranted regulatory burdens; (4) Federal consumer financial law is enforced consistently, without regard to the status of a person as a depository institution, in order to promote fair competition; and (5) markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.”

Section 1022 – Rulemaking Authority

For the first time, Congress has granted a regulatory body the power to formulate broad rules that will impact debt collectors, as well as all other entities that deal with consumer services and products. Theoretically, this could be a welcome change for debt collectors, because new regulations could provide collectors with much needed clarity under the FDCPA where the courts have failed to provide consistent guidance. Some fear, though, that the new regulations will not bring much clarity, and will simply make it even more difficult to collect.

The Bureau has been given the sweeping powers to “prescribe rules and issue orders and guidance, as may be necessary or appropriate” under the federal consumer financial protection laws. In making rules, the Bureau “shall consider (i) the potential benefits and costs to consumers and covered persons, including the potential reduction of access by consumers to consumer financial products or services resulting from such rule; and (ii) the impact of proposed rules on covered persons, as described in section 1026, and the impact on consumers in rural areas.”

It is possible, in theory, for debt collectors or other covered persons to obtain exemptions from select provisions of the CFPA, or from certain of the rules that may be implemented by the Bureau. The Bureau has the ability to exempt any “class of covered persons, service providers or consumer financial services or products, from any provision of this title, or from any rule issued under this title.”

At this point, it is unclear how commonly these exemptions will be granted, but the CFPA establishes the factors that the Bureau must consider in connection with granting exemptions, including “(i) the total assets of the class of covered persons; (ii) the volume of transactions involving consumer financial products or services in which the class of covered persons engages; and (iii) existing provisions of law which are applicable to the consumer financial product or service and the extent to which such provisions provide consumers with adequate protections.”

Section 1027 – Limitations On Authorities Of the Bureau; Preservation of Authorities

Debt collection attorneys will be regulated by the CFPA and the Bureau, unless they obtain an exemption. With respect to attorneys, the CFPA initially provides that the Bureau “may not exercise any supervisory or enforcement authority with respect to an activity engaged in by an attorney as part of the practice of law under the laws of a State in which the attorney is licensed to practice law. ” While this may sound encouraging to collection attorneys, the CFPA also provides that this limitation on the Bureau’s regulatory power “shall not be construed so as to limit the authority of the Bureau with respect to any attorney, to the extent that such attorney is otherwise subject to any of the enumerated consumer laws or the authorities transferred” to the Bureau. Thus, to the extent that an attorney is subject to the FDCPA – which is one of the enumerated consumer laws transferred to the Bureau – that attorney is also subject to the CFPA and the regulatory powers of the Bureau.

Section 1031 – Prohibiting Unfair, Deceptive or Abusive Acts Or Practices

The Bureau has the power to proscribe new rules that will apply to any debt collector or service provider, and those rules can identify “as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.”

There is some good news for debt collectors in that the definitions used by the CFPA seem to acknowledge that only practices that cause some “material” harm to consumers should be deemed unlawful. For example, when determining that an act or practice is unlawful because it is “unfair,” the Bureau must have a “reasonable basis to conclude that (A) the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and (B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”

Similarly, before any act or practice may be declared unlawful because it is “abusive,” the Bureau must find that it “(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of – (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”

Section 1032 – Disclosures

Model forms and safe harbors may be on the horizon for debt collectors. The CFPA provides that the Bureau may proscribe disclosure rules that are designed to ensure that the “features of any consumer financial product or service, both initially and over the term of the product or service, are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.” Thus, the Bureau has the ability to impose new disclosure requirements upon debt collectors, because they are dealing with consumers “over the term of the product or service. . . .”

The Bureau has the power to create “model disclosures” that can be used for this purpose, and the Act provides that any “covered person that uses a model form included with a rule issued under this section shall be deemed to be in compliance with the disclosure requirements of this section with respect to such model form.” This could be welcome news for debt collectors who have, for example, struggled to design section 1692g letters, settlement letters and privacy notices that do not run afoul of the FDCPA.

Section 1033 – Consumer Rights To Access Information

The Bureau can also implement rules requiring debt collectors and other covered persons to provide information to consumers upon request. The CFPA provides that, subject to rules prescribed by the Bureau, “a covered person shall make available to a consumer, upon request, information in the control or possession of the covered person concerning the consumer financial product or service that the consumer obtained from such covered person, including information relating to any transaction, series of transactions, or to the account including costs, charges and usage data. The information shall be made available in an electronic form usable by consumers.” The Bureau may set rules that would provide standardized formats in which this information must be provided.

It is unclear how any new requirements imposed under this section, and under section 1034 (discussed below), will interact with the existing dispute and validation requirements of section 1692g of the FDCPA.

Section 1034 – Responses To Consumer Complaints And Inquiries

Regarding consumer complaints, the Bureau will receive complaints from consumers, and where appropriate, the Bureau can direct debt collectors and other covered persons to respond to the Bureau regarding the status of the complaint. The debt collector’s response may need to include “(1) steps that have been taken by the covered person to respond to the complaint or inquiry of the consumer; (2) responses received by the covered person from the consumer; and (3) follow-up actions or planned follow-up actions by the covered person to respond to the complaint or inquiry of the consumer.”

Section 1034 of the Act also includes an ongoing duty for debt collectors and other covered persons to respond in a “timely manner” to consumer inquiries, including consumer requests for documentation regarding debts. The Act describes this duty as follows: “A covered person subject to supervision and primary enforcement by the Bureau pursuant to section 1025 shall, in a timely manner, comply with a consumer request for information in the control or possession of such covered person concerning the consumer financial product or service that the consumer obtained from such covered person, including supporting written documentation, concerning the account of the consumer.”

Section 1036 – Prohibited Acts

The CFPA declares that it shall be “unlawful” for debt collectors or other covered persons or service providers to “(A) to offer or provide to a consumer any financial product or service not in conformity with Federal consumer financial law, or otherwise commit any act or omission in violation of a Federal consumer financial law; or (B) to engage in any unfair, deceptive, or abusive act or practice.”

The Act also declares it unlawful for “(2) any covered person or service provider to fail or refuse, as required by Federal consumer financial law, or any rule or order issued by the Bureau thereunder– (A) to permit access to or copying of records; (B) to establish or maintain records; or (C) to make reports or provide information to the Bureau.”

Finally, the Act includes a provision akin to aiding and abetting liability, which declares it unlawful for “(3) any person to knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of the provisions of section 1031, or any rule or order issued thereunder, and notwithstanding any provision of this title, the provider of such substantial assistance shall be deemed to be in violation of that section to the same extent as the person to whom such assistance is provided.”

Section 1041 – Relation To State Law

The CFPA does not preempt state laws, except to the extent that a provision of state law is inconsistent with the Act. Thus, the CFPA states that it “may not be construed as annulling, altering, or affecting, or exempting any person subject to the provisions of this title from complying with, the statutes, regulations, orders, or interpretations in effect in any State, except to the extent that any such provision of law is inconsistent with the provisions of this title, and then only to the extent of the inconsistency.”

A state law is not inconsistent with the CFPA, however, if the state law provides consumers with greater protections than the CFPA. Accordingly, the Act provides: “For purposes of this subsection, a statute, regulation, order, or interpretation in effect in any State is not inconsistent with the provisions of this title if the protection that such statute, regulation, order, or interpretation affords to consumers is greater than the protection provided under this title. A determination regarding whether a statute, regulation, order, or interpretation in effect in any State is inconsistent with the provisions of this title may be made by the Bureau on its own motion or in response to a nonfrivolous petition initiated by any interested person.”

Section 1054 – Litigation Authority

One bright spot for debt collectors is that the CFPA does not contain a provision that allows for a private right of action for consumers. Only the Bureau can file civil actions against any person who violates the CFPA “to impose a civil penalty or to seek all appropriate legal and equitable relief including a permanent or temporary injunction as permitted by law.”

The statute of limitations for any such action by the Bureau is three years “after the date of discovery of the violation to which an action relates.”

Section 1055 – Relief Available

The Act provides for a broad range of remedies that may be obtained by the Bureau for violations of the CFPA or other consumer financial laws, including: “(A) rescission or reformation of contracts; (B) refund of moneys or return of real property; (C) restitution; (D) disgorgement or compensation for unjust enrichment; (E) payment of damages or other monetary relief; (F) public notification regarding the violation, including the costs of notification; (G) limits on the activities or functions of the person; and (H) civil money penalties, as set forth more fully in subsection( c ).”

The Bureau may not recover punitive damages, but the Act does provide for recovery of costs, as well as the imposition of potentially significant civil penalties.

Saturday, July 17, 2010

FTC Issues Report "Repairing A Broken System: Protecting Consumers In Debt Collection Litigation And Arbitration"

After conducting a series of roundtable discussions with industry experts in Chicago, San Francisco and Washington, D.C., the FTC recently released its report entitled: "Repairing A Broken System: Protecting Consumers In Debt Collection Litigation And Arbitration." A copy of the report can be read and downloaded here:

FTC Report.Repairing A. Broken System.Protecting Consumers In Debt Collection Litigation And Arbitration -

The Executive Summary to the Report acknowledges the critical role that collectors play in the health of the economy. The FTC states: "Credit benefits consumers by allowing them to obtain goods and services without paying the entire cost at the time of purchase. This lets consumers make purchases they might not otherwise be able to afford, and allows them to benefit from goods and services immediately while paying for them over time. Because consumers sometimes fail to pay their creditors, debt collection plays a vitally important role in the consumer credit system. Debt collection benefits individual creditors, of course, who are repaid money they are owed. More importantly, however, by providing compensation to creditors when consumers do not repay their debts, the debt collection system helps keep credit prices low and helps ensure that consumer credit remains widely available."

Having said this, however, the balance FTC's report is highly critical of the debt collection industry generally, and critical of the collection litigation and arbitration process specifically. While the report made a splash when it was announced, it is unclear whether the FTC will actually play any significant role with respect to the issues the report has raised. Will the report be a catalyst for change, or much ado about nothing?

For example, many of the recommendations made by the FTC would require wholesale changes to the rules of civil procedure and substantive rules bearing on state court collection litigation -- changes that state legislatures would need to enact. States would need to be convinced that it made sense to pass an entirely new set of rules that would apply to debt collection cases only, as opposed to other forms of civil litigation. States may conclude, contrary to the implicit assumption in the FTC report, that their existing rules governing civil litigation already provide consumers with sufficient protections.

The FTC also seems fixated on the notion that collectors throughout the country are routinely filing lawsuits that seek to collect on time-barred debt, though the report does not cite to empirical studies to provide support for this belief. The report recommends that collectors be forced to notify consumers and courts when the debt at issue may be beyond the applicable limitations period, and that collectors should advise consumers that subsequent payments may restart the limitations period. The FTC does not explain why any litigant should be required to disclose the existence of a potential affirmative defense to its adversary, or why a potential statute of limitations defense should be highlighted in collection litigation, as opposed to various other affirmative defenses that the consumer might possess. The FTC, of course, has no ability to enact state legislation, and its ability to influence rule changes at the state court level is far from clear.

The report also makes a number of recommendations with respect to debt collection arbitration proceedings that appear to be at odds with the policies underlying the Federal Arbitration Act and decades of jurisprudence favoring the resolution of disputes through private arbitration. The report is highly-critical of creditors who include mandatory pre-dispute arbitration clauses in their customer agreements, though it acknowledges that such agreements are legally enforceable. The report suggests that consumer arbitration awards should include reasoned opinions from the arbitrators. Yet there would be no precedential value in those opinions, and they would likely serve to increase the number of subsequent challenges to the awards, contrary to goal of creating a simple, streamlined process for reaching final adjudications of disputes. The report notes that consumers often do not participate in arbitration proceedings, and that creditors prevail in the vast majority of cases. From this, and from other anecdotal evidence, the report suggests that consumers are not being adequately notified of the arbitration process, and that the process is inherently biased or unfair to consumers. The FTC report cites liberally to the unproven allegations of bias that have been leveled against consumer arbitration providers by litigants and consumer attorneys.

The FTC does not have the power to amend the FDCPA in order to implement any of the recommendations in its report. The FTC can make recommendations to Congress about potential changes to the FDCPA. But the new Bureau of Consumer Financial Protection (formed by the Dodd-Frank Act) will be given concurrent authority with the FTC to enforce the FDCPA, and only the Bureau will also have rule-making authority under the FDCPA. This means that the Bureau can issue regulations that will graft on top of the FDCPA, but the FTC cannot do so. The Bureau will also have other broad powers over the collection industry. All the FTC can do is issue opinion letters (it has only done this a few times since the FDCPA was enacted in 1977), and bring enforcement actions against collection companies.

The following recommendations are contained in the FTC's report:

"States should consider adopting measures to make it more likely that consumers will defend in litigation. Very few consumers defend or otherwise participate in debt collection litigation, resulting in courts entering default judgment against them. States should take steps to ensure that: (1) consumers receive adequate notice when actions have been commenced; and (2) the costs to consumers of participating in such actions are not prohibitively high."

"States should require collectors to include more information about the debt in their complaints. Complaints often do not contain sufficient information to allow consumers in their answers to admit or deny the allegations and assert affirmative defenses. To assist them in doing so, states should consider requiring that debt collection complaints include: (1) the name of the original creditor and the last four digits of the original account number; (2) the date of default or charge-off and the amount due at that time; (3) the name of the current owner of the debt; (4) the total amount currently owed on the debt; (5) the total amount owed broken down by principal, interest, and fees; and (6) the relevant terms of the underlying credit contract, if the contract itself is not attached to the complaint."

"States should take steps to make it less likely that collectors will sue on time-barred debt and that consumers will unknowingly waive statute of limitations defenses available to them. In circumstances where it is difficult to determine the correct statute of limitations, it would be advantageous if states developed more clear and uniform statutes of limitations. Consumers do not understand that in many states a statute of limitations constitutes an affirmative defense which may preclude collectors from successfully suing to collect, so they rarely assert this affirmative defense. These states should assign to collectors the burden of proving that debts are not time-barred and require that they include the date of default and the statute of limitations in their complaints. Consumers are not aware that collectors cannot lawfully sue to recover on time-barred debt. To prevent deception, collectors who seek to collect debt they know or should know is time-barred should disclose that they cannot lawfully sue the consumers. Consumers likewise do not know that in many states making a partial payment on a time-barred debt revives the entire debt for a new statute of limitations period. Collectors in these states should disclose to consumers that making a payment will revive such debt."

"Federal and state laws should be changed to prevent the freezing of a specified amount in a bank account into which a consumer has deposited funds that are exempt from garnishment. When banks freeze the accounts of consumers who receive government payments such as Social Security (which are exempt from garnishment), it may result in significant hardship for consumers, including many who are indigent. To alleviate such hardship, federal and state laws should be changed to limit the amount that banks can freeze in accounts receiving exempt funds."

"The Commission’s principal findings, conclusions, and recommendations relating to debt collection arbitration are:"

"Consumers should be given meaningful choice about arbitration. Consumers currently have little, if any, choice regarding mandatory pre-dispute arbitration provisions in contracts. Creditors should draft their consumer credit contracts in a way that ensures consumers are aware of their choice whether to arbitrate, and provides consumers with a reasonable method of exercising that choice. The public and private sectors should increase efforts to educate consumers, so that they have a basic understanding of arbitration and its consequences. They should evaluate whether, and under what conditions, options beyond the initial choice about arbitration must be offered in consumer credit contracts."

"Arbitration forums and arbitrators should eliminate bias and the appearance of bias. Especially in the wake of serious concerns relating to the conduct of NAF, arbitration forums should take significant and concrete steps to prevent bias and the appearance of bias. Forums should develop, adopt, and vigorously enforce standards prohibiting bias and the appearance of bias for themselves and their arbitrators. Forums should diversify their rosters of arbitrators, rotate matters randomly among arbitrators, and limit the number of matters each arbitrator handles. Forums should make the process and procedures they use for selecting arbitrators as transparent as possible."

"Arbitration forums should conduct proceedings in a manner which makes it more likely consumers will participate. Consumers frequently do not appear in arbitration proceedings. While it is not clear to what extent notification problems cause low participation rates, arbitration forums should adopt measures to increase the likelihood they have valid addresses for consumers, track and document delivery of notices, and use envelopes which make it clear that their contents are important while not disclosing consumer debts to third parties. Arbitration forums and arbitrators also should conduct a closer assessment of consumers’ assertions that they did not receive adequate notice."

"Arbitration forums should establish rules that limit the total cost to consumers of arbitrating a dispute to the cost that they would pay to defend against a similar proceeding in court."

"Arbitration forums should require that awards contain more information about how the case was decided and how the award amount was calculated. Arbitrators rarely accompany awards with an opinion setting forth a statement of the law and an application of the law to the facts, which makes it difficult to understand the basis for the award. Arbitration forums should require that arbitrators issue reasoned opinions setting forth: (1) the law applied; (2) how the law was applied to the facts; and (3) how the amount of the award was calculated, including how the amount of principal, interest, and fees awarded was determined."

"Arbitration forums should make their process and results more transparent. For the public to assess the costs and benefits of arbitration, and for consumers to decide whether to agree to arbitration, the process used and the results reached must be more transparent. To promote such transparency, Congress should consider creating a nationwide system requiring arbitration forums to report and make public arbitration awards and decisions."

"The Commission will continue to closely monitor debt collection arbitration, and evaluate whether creditors and arbitration forums provide consumers with meaningful choice and fair process. As appropriate, the Commission will report its views on new debt collection arbitration models to policymakers, industry, consumer groups, and the general public."