Avoiding Overshadowing Claims

             Section 1692g of the FDCPA says collectors must provide notice to consumers within five days of the initial communication regarding the debt, stating the amount of the debt, the name of the current creditor, and explaining the consumer’s right to dispute the debt and to obtain verification. You might assume that a collector can comply with that section by simply copying the language from the statute into their initial notice to consumers.  Simple enough to include this language and move on, right?  Not exactly. 

            Although collectors are not required to quote from the text of section 1692g verbatim, that is probably a good first step.  Even if the letter tracks the language of the statute word for word, however, a collector may still draw an “overshadowing” claim if he says something, or does something, during the thirty-day validation period that may confuse the consumer about their section 1692g rights.  To avoid overshadowing claims, collectors must assess not only the wording, typeface and layout of their initial letters, but also all of their consumer interactions during the 30-day validation period. 

            It is not always easy to predict the language or conduct that might give rise to an overshadowing claim.  The First Circuit recently observed: “Overshadowing is rarely a black-or-white proposition: there are many shades of gray.  It is impossible to catalogue the manifold ways, some subtle and some not, in which a debt collector may attempt to circumnavigate section 1692g.”  Pollard v. Law Office of Mandy L. Spaulding, 766 F.3d 98, 106 (1st Cir. 2014) (citation omitted).

The section 1692g requirements

            To answer the question “what is overshadowing?” we look first to what Congress said the validation notice must contain.  Section 1692g requires that within five days of the “initial communication with a consumer in connection with the collection of any debt” a collector must send the consumer a written notice containing, inter alia,  the amount of the debt, and the name of the creditor to whom the debt is owed.  See 15 U.S.C. § 1692g(a)(1), (2).  The notice must contain “a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector; . . .”.  Id. § 1692g(a)(3).  In addition, the notice must include “a statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; . . .” Id. § 1692g(a)(4).  Finally, the notice must contain “a statement that, upon the consumer's written request within the thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.”  Id. § 1692g(a)(5).

            The statute gives certain limited protections to a consumer who disputes the debt during the 30-day period.  If the consumer verbally disputes the debt, the collector need not respond, but the collector is no longer entitled to assume the debt is valid.  Id. at § 1692g(a)(3).  If a written dispute is sent by the consumer, the collector must cease further collection efforts until it provides the consumer with verification of the debt, a copy of a judgment, or, if it has been requested, the name and address of the original creditor.  Id. at § 1692g(a)(4), (5).  The statute also provides: “Any collection activities and communication during the 30-day period may not overshadow or be inconsistent with the disclosure of the consumer's right to dispute the debt or request the name and address of the original creditor.”  Id. at § 1692g(b).

Obscuring the validation notice

            The consumer must receive notice of his section 1692g rights in a manner that it not confusing.  As the First Circuit observed, “confusion can occur in a myriad of ways, such as when a letter visually buries the required validation notice, contains logical inconsistencies, fails to explain an apparent inconsistency, or presents some combination of these (or similar) vices.  In the last analysis, a collection letter is confusing if, after reading it, the unsophisticated consumer would be left unsure of her right to dispute the debt and request information concerning the original creditor. The emphasis, then, is on practical effect.”  Pollard, 766 F.3d at 104 (citations omitted); see also Swanson v. Southern Oregon Credit Servs, Inc., 869 F.2d 1222, 1225 (9th Cir. 1989) (“The statute is not satisfied merely by inclusion of the required debt validation notice;  the notice Congress required must be conveyed effectively to the debtor.   It must be large enough to be easily read and sufficiently prominent to be noticed – even by the least sophisticated debtor.  Furthermore, to be effective, the notice must not be overshadowed or contradicted by other messages or notices appearing in the initial communication from the collection agency.”) (citations omitted).

            Even if the letter contains the full validation notice, it will violate section 1692g if the language of the notice is obscured by other text in the letter.  See Swanson, 869 F.2d at 1225 (notice was “dwarfed” by bold faced type, several times larger than notice, stating: “IF THIS ACCOUNT IS PAID WITHIN THE NEXT 10 DAYS IT WILL NOT BE RECORDED IN OUR MASTER FILE AS AN UNPAID COLLECTION ITEM. A GOOD CREDIT RATING--IS YOUR MOST VALUABLE ASSET.”); compare Terran v. Kaplan, 109 F.3d 1428, 1434 (9th Cir. 1997) (no overshadowing: “The text of the letter is uniformly presented in ordinary, same-size font.  No emphasis is placed on any particular statement, with the exception of the creditor's name and the name of the person to contact at Kaplan's office, both of which appear in uppercase letters.”).  Even when a letter has a friendly tone, its content may overshadow the validation notice if it contains language that obscures the debtor’s section 1692g rights.  See, e.g., Caprio v. Heathcare Revenue Recovery Group, LLC, 709 F.3d 142, 151 (3d Cir. 2013) (letter stating “if you feel you do not owe this amount, please call us toll free” overshadowed notice; consumer may believe that a phone call was sufficient to trigger duty to verify debt); Abramov v. I.C. Systems, Inc., _ F.Supp.3d_, 2014 WL 5147549 at *5 (E.D.N.Y Oct. 14, 2014) (directing consumer to dispute debt “in writing” if identity theft is suspected may overshadow right to verbally dispute debt); Oberther v. Midland Credit Management, Inc., _F.Supp.3d_, 2014 WL 4548871, at *6 (D. Mass. Sept. 15, 2014) (letter that gave only two options to stop referral of account to attorney – mail payment, or call to settle - without mentioning that submitting a dispute would also do so, overshadowed validation notice).

Demanding immediate payment

            A collector is free to make a demand for immediate payment during the 30-day validation period.  Doing so, however, can be risky.  For example, in Savino, although a collector’s “request for immediate payment did not, standing alone, violate the FDCPA”, the letter violated the section 1692g by failing to also explain that the demand for immediate payment did not override the right to seek validation.  See Savino v. Computer Credit, Inc., 164 F.3d 81, 86 (2d Cir. 1998) (notice stating “[t]he hospital insists on immediate payment or a valid reason for your failure to make payment” violated section 1692g); see also Russell v. Equifax, 74 F.3d 30, 34 (2d Cir. 1996) (the phrase “if you pay it within the next 10 days we will not post this collection to your file” overshadowed the validation notice).

            Requesting “immediate” payment was held permissible in Wilson v. Quadramed Corp., 225 F.3d 350 (3d Cir. 2000), where the Court found that language stating the account had been placed with agency for “immediate collection” and that the agency would “afford [the debtor] the opportunity to pay this bill immediately and avoid further action against you” was not confusing.  Id. at 356.  The debtor was properly “presented with two options: (1) an opportunity to pay the debt immediately and avoid further action, or (2) notify Quadramed within thirty days after receiving the collection letter that he disputes the validity of the debt.  As written, the letter does not emphasize one option over the other, or suggest that Wilson forego the second option in favor of immediate payment.”  Id.  Similarly, in Renick v. Dun & Bradstreet, 290 F.3d 1055 (9th Cir. 2002), the Court held that a letter asking the debtor to “send payment today” and stating that “PROMPT PAYMENT IS REQUESTED” did not overshadow the validation notice.  Id. at 1057.  In the same vein, the Court in Peter v. GC Services, LP, 310 F.3d 344 (5th Cir. 2002), held that the phrase “FULL COLLECTION ACTIVITY WILL CONTINUE UNTIL THIS ACCOUNT IS PAID IN FULL” did not overshadow the notice.  Id. at 349.  Likewise, in Taylor v. Cavalry Investment, LLC, 365 F.3d 572 (7th Cir. 2004), the Court held that the phase “Act now to satisfy this debt” was “in the nature of puffing” and did not overshadow the language explaining the debtor’s right to seek validation during the 30-day period.  Id. at 575; see also Gruber v. Creditor Protection Serv., Inc., 742 F.3d 271, 275 (7th Cir. 2014) (language stating “We believe you want to pay your just debt” was puffing and did not overshadow the validation notice).  In Terran, the Court held that the phrase “Unless an immediate telephone call is made to J SCOTT, a collection assistant of our office at (602) 258-8433, we may find it necessary to recommend to our client that they proceed with legal action” did not overshadow the validation notice, because it did not require “payment” immediately and merely requested a phone call.  Terran, 109 F.3d at 1434.

Threatening suit or filing suit

            A collector can file suit, and may refer to a potential lawsuit, within the 30-day validation period.  Again, doing so can be very risky.  In Avila v. Rubin, 84 F.3d 222 (7th Cir. 1996), after reciting the validation notice, the letter promptly overshadowed it by stating “if the above does not apply to you, we shall expect payment or arrangement for payment to be made within ten (10) days” in order to avoid “additional proceedings by our firm” including a potential “civil suit” by the creditor.  Id. at 226.  The letter in Bartlett v. Heibl, 128 F.3d 497 (7th Cir. 1997) overshadowed by validation notice by stating “if you wish to resolve this matter before legal action is taken you must do one of two things within a week of the date of this letter”: pay the debt or call the creditor to “make suitable arrangements for payment.”  Id. at 499.  The Court held that the language regarding a potential suit was confusing when read together with the validation notice: “He might well wonder what good it would do him to dispute the debt if he can't stave off a lawsuit.”  Id. at 501.  Although the First Circuit agreed in Pollard that the validation period was “not a grace period” it held that the letter overshadowed the notice, because it suggested “that a lawsuit is going to proceed without delay whether the consumer disputes the debt or not.”  Pollard, 766 F.3d at 105.  The Second Circuit held in Ellis v. Solomon And Solomon, P.C., 591 F.3d 130 (2d Cir. 2010) that serving a consumer with a summons and complaint during the 30-day validation period overshadowed the validation notice, because the collector did not provide “an explanation” clarifying that the lawsuit had no effect on the information contained in the notice.  Id. at 136.

             By contrast, in Zemekis v. Global Credit and Collection Corp., 679 F.3d 632 (7 th Cir. 2012), language stating that the debtor’s account “now meets ... [the] guidelines for legal action” and that “Capital One Bank (USA), N.A. may be forced to take legal action” did not overshadow the notice, because “The letter warns only that Capital One Bank had the right to pursue legal action. . . . As written, the letter alerted Zemeckis only to the possible repercussions she faced for failing to pay.”  Id. at 636-37.  In FHML v. Lamar, 503 F.3d 504 (6th. Cir. 2007), the collector did not overshadow the validation notice when it served a collection complaint that included the validation language in the text of the pleading.  The consumer was properly advised that under state law, she had to respond to the complaint in twenty days, but she had thirty days to dispute the debt under the FDCPA.  Id. at 511; see also Lansing v. Wilford, Geske & Cook, P.A., 2013 WL 5587956, at *4 (D. Minn. Oct. 10, 2013)(foreclosure complaint would not overshadow where validation letter stated:  “[a]ny future actions taken by our office to begin a foreclosure proceeding do not terminate or limit the thirty-day period to dispute the validity of the debt, or any portion thereof, or your ability to request verification of the debt or the name of the original creditor, as described above.”). 

Mentioning negative credit reporting         

            Informing debtors of the potential negative consequences of their failure to pay does not necessarily overshadow the validation notice.  In Durkin v. Equifax, 406 F.3d 410 (7th Cir. 2005), a letter stating “CONTINUED REFUSAL TO HONOR THIS RETURNED CHECK WILL RESULT IN YOUR CREDIT FILE BEING IMPACTED WITH A NEGATIVE REFERENCE WHICH MAY IMPACT FUTURE CREDIT GRANTING DECISIONS” did not overshadow the validation notice.  Id. at 425.  The Court observed: “these letters do not indicate that the time for disputing the debt has passed.  Nor do they misrepresent or cloud the amount of time remaining to dispute the debt.  The letters encourage debtors to pay their debts by informing them of the possible negative  consequences of failing to pay.  The letters simply do not contain any overt misinformation, apparent contradiction, or noticeable lack of clarity concerning the validation period or the debtor's rights under § 1692g.”  Id. at 417-18.  The Fifth Circuit followed this same reasoning in McMurray v. ProCollect, Inc., 687 F.3d 665 (5th Cir. 2012), where the letter warned the consumer:  “It is important that you pay your debt as failure to timely validate the referenced amount due will cause us to report your account to the credit reporting agencies.  The negative mark can remain on your credit for up to seven (7) years, and may among other things significantly affect your ability to: (1) OBTAIN CREDIT; (2) OBTAIN EMPLOYMENT; (3) PURCHASE HOME OR CAR; OR (4) QUALIFY FOR APARTMENT RENTAL.”  Id. at 667.  In rejecting the overshadowing claim, the Fifth Circuit stated: “The supposed threat falls in the category of letters that encourage debtors to pay their debts by informing them of the possible negative consequences of failing to pay, words that do not overshadow the required notice language. . . The letter in this case essentially provided such warnings and nothing more.  Thus, the notice language in ProCollect's letter is not overshadowed by the letter's bad-credit warnings.”  Id. at 671 (citations and quotation marks omitted).

Conclusion

            To avoid overshadowing claims, the best place to start is with the text of your validation letter.  Make sure that it tracks the language of the statute, and that it does not contain any other language that might arguably obscure or contradict the debtor’s validation rights.  Collectors should also assess any other communications or conduct that occurs within the 30-day validation period to determine if it presents any overshadowing risks.  

Why The CFPB's Position On Time-Barred Debt Is Bad For Consumers

            Does a consumer need to be “protected” from repaying his own debts?  Can a consumer be “harmed” if he voluntarily makes a payment on a debt that he admittedly owes?  The CFPB apparently believes that sometimes the answer is “yes.” 

            The CFPB and the FTC have forcefully argued that debt collectors should make an affirmative disclosure to consumers when they are seeking to collect debts that cannot be judicially enforced, and that the failure to make this disclosure may violate the FDCPA.  This is necessary, according to the CFPB and FTC, because consumers are usually unfamiliar with the statute of limitations that apply to their debts, and a collector’s failure to disclose that the debt is no longer judicially enforceable could have “adverse consequences” to a consumer.  In other words, the consumer might actually pay the debt he owes, unless the collector “protects” him by affirmatively advising him that the collector cannot sue to collect it. 

            The CFPB wants seriously delinquent consumers to know their debts are no longer judicially enforceable so they can make an informed decision to not repay them.  But does this make for good “consumer protection” policy?  Not really.  If the CFPB discourages delinquent consumers from paying debts they admittedly owe, this raises the cost of credit for all consumers, and it may eliminate the availability of credit to low and moderate income consumers who need it the most.  And if consumers stop paying on seriously delinquent accounts, this will force creditors and collectors to file even more lawsuits, so the creditor can be sure to collect before the limitations period has run. 

            But wait a minute, you say, why would the CFPB take this position?  I thought it was important for consumers to repay their debts. And I thought that debt collection was critically important to the economy, because it helps to keep the cost of credit lower, and helps keep credit widely available for all consumers. When people repay the debts they owe, this makes credit more available and more affordable, and all consumers benefit, right? 

            You are right on all these points.  Indeed, the FTC and CFPB have repeatedly told us that you are right.  For example, in the February 2009 report issued by the FTC entitled “Collecting Consumer Debts: The Challenges Of Change” the FTC reminded us: “Consumer credit is a critical component of today’s economy. Credit allows consumers to purchase goods and services for which they are unable or unwilling to pay the entire cost at the time of purchase. By extending credit, however, creditors take the risk that consumers will not repay all or part of the amount they owe. If consumers do not pay their debts, creditors may become less willing to lend money to consumers, or may increase the cost of borrowing money.”  See Executive Summary, pp. ii-iii.

            The FTC was even more forceful on this point in its report in July 2010 entitled “Repairing A Broken System: Protecting Consumers In Debt Collection Litigation And Arbitration” where it stated:  “Credit benefits consumers by allowing them to obtain goods and services without paying the entire cost at the time of purchase. . . . 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.”  See Executive Summary, p. i.

            These same points were echoed by the CFPB on March 20, 2013 in its Annual Report To Congress on the Fair Debt Collection Practices Act, where it stated: “Consumer debt collection is critical to the functioning of the consumer credit market. By collecting delinquent debt, collectors reduce creditors’ losses from non-repayment and thereby help to keep consumer credit available and potentially more affordable to consumers.  Available and affordable credit is vital to millions of consumers because it makes it possible for them to purchase goods and services that they could not afford if they had to pay the entire cost at the time of purchase.” See CFPB’s Report To Congress, p. 9.

            Thus, CFPB and FTC have publicly stated that when delinquent consumers repay the debts they actually owe, all consumers benefit.  And of course the economic benefit that comes from repayment of a debt does not magically evaporate when the statute of limitations on the debt expires.  Why, then, has the CFPB so adamantly insisted that consumers must be advised by collectors when the statute of limitations has expired.  What exactly is the “consumer protection” goal that is being met here?  The answer is not clear.

            Through its Amicus Program, the CFPB has been an active supporter of consumer class action attorneys who have sued collectors alleging that an offer to “settle” a time-barred debt is a misleading and deceptive practice that violates the FDCPA.  For example, the CFPB filed an amicus brief in support of the consumer in the Seventh Circuit Court of Appeals in Delgado v. Capital Management Services, LP, No. 13-2030, where the CFPB argued that “actual or threatened litigation is not a necessary predicate for an FDCPA violation in the context of time-barred debt . . . Depending on the circumstances, a time-limited settlement offer could plausibly mislead an unsophisticated consumer to believe a debt is enforceable in court even if the offer is unaccompanied by any clearly implied threat of litigation.” See CFPB’s Delgado Brief at p.2. The CFPB acknowledged in its brief that: “[i]n most states, the expiration of the statute of limitations on a debt does not extinguish the debt.”  Despite the fact that time-barred debts are not extinguished, however, the CFPB argued that “The running of the statute [] works to the benefit of consumers who owe debts that become stale.”  Id. at p. 12-13. In other words, the seriously delinquent consumer will “benefit” if the statute of limitations runs, because the creditor can no longer sue that consumer to collect it.  But do the rest of us consumers also “benefit” if that consumer does not repay the money they owe?  Not so much.

            In another case that is now pending before the Sixth Circuit Court of Appeals, Buchanan v. Northland Group Inc., No. 13-2523, the CFPB filed another amicus brief in support of the FDCPA class action attorneys who lost that case at the district court level.  There, the CFPB reiterated the FTC’s position that “consumers do not expect” that a partial payment “will have the serious, adverse consequence of starting a new statute of limitations” and that collectors may violate the FDCPA if they fail to disclose “clearly and prominently to consumers prior to requesting or accepting such payments that (1) the collector cannot sue to collect the debt and (2) providing a partial payment would revive the collector’s ability to sue to collect the balance.”       See CFPB’s Buchanan Brief at pages 17-18.  Again, the “serious, adverse consequence” to the delinquent consumer in this example is that they actually may have to pay a debt that they owe.  But if these consumers refuse to pay because they are advised that the statute of limitations has run, what about the “adverse consequences” to the rest of us, the paying consumers, who the CFPB is also supposed to protect?

            Surely the courts will continue to recognize that there is nothing wrong with offering to settle a time-barred debt, so long as the collector does not threaten sue, right?  Nope.  In a setback for paying consumers everywhere, the Seventh Circuit recently adopted the position urged by the CFPB in McMahon v. LVNV Funding, 744 F.3d 1010 (7th Cir. 2014), which held that a letter offering to “settle” a debt violated section 1692e and 1692f of the FDCPA, because the limitations period had expired.  Relying in part on the “well-reasoned position put forth by the FTC and CFPB” in their amicus brief (the Delgado case was combined with McMahon on appeal), the Court held that the running of the limitations period a “central fact” about the “legal status” of a debt, and therefore will be important for a consumer to know if the limitations period has run.  “The proposition that a debt collector violates the FDCPA when it misleads an unsophisticated consumer to believe a time-barred debt is legally enforceable, regardless of whether litigation is threatened, is straightforward under the statute. Section 1692e(2)(A) specifically prohibits the false representation of the character or legal status of any debt. Whether a debt is legally enforceable is a central fact about the character and legal status of that debt.  A misrepresentation about that fact thus violates the FDCPA.  Matters may be even worse if the debt collector adds a threat of litigation, see 15 U.S.C. § 1692e(5), but such a threat is not a necessary element of a claim.” Id. at 1020.

            In light of McMahon and in view of the CFPB’s position on the subject, can collectors safely collect on time-barred accounts?  It will not be easy, since any offer to “settle” those accounts could lead to a class action lawsuit alleging that the collector implied the account is legally enforceable.  If creditors know they are unlikely to collect on their accounts once the limitations period has expired, the only sensible approach is to sue every consumer before the statute expires.  Is increased litigation the best way to protect consumers?  Or should creditors simply stop collecting all their accounts once the limitations period expires and then raise the cost of credit for the rest of us?

            One basic economic point that has been made by the CFPB and the FTC in their reports cannot be disputed: the repayment of legitimate debts is good for consumers.  This issue was discussed at length at the 2013 NARCA Legal Symposium by a panel of economists and regulators, who pointed out the cruel irony of how low and moderate income consumers are the more likely to be harmed by the increasing cost of credit, and restricted availability of credit, which results when consumer debts are not repaid.

            All consumers deserve the CFPB’s protection, not just the seriously delinquent ones.  The CFPB should consider the unintended consequences of its position, which will encourage seriously delinquent consumers to avoid payment of time-barred debts, and will increase the cost and reduce the availability of credit for the rest of us. 

Is The CFBP's Position On Credit Reporting Statements Consistent With The Case Law?

     The CFPB does not want debt collectors to tell consumers that paying their debts might help them to improve their credit score.  Nor does the CFPB want collectors to encourage consumers to pay by informing them that their failure to do so might harm their credit.  The Bureau made this point crystal clear in the Bulletin that it issued in July 2013 entitled “Representations Regarding Effect of Debt Payments on Credit Reports and Scores” where it claimed that making such statements might amount to a deceptive act or practice in violation of the FDCPA and the Dodd-Frank Act.  But is the CFPB’s position on this point consistent with case law on this subject?  Not really.  It turns out that courts from around the country have repeatedly recognized that collectors can, and perhaps should, seek to encourage consumers to pay their debts by informing of them of the potential impact on their credit.

             Before diving in to the discussion, consider some context on credit reporting provided to us by Congress. As part of the Fair Credit Reporting Act, Congress mandates that certain furnishers of information must provide consumers with a “clear and conspicuous” written notice that negative information is being reported about them to the consumer reporting agencies.  See 15 U.S.C. §§ 1681s-2(a)(7)(A)(i), 1681s-2(a)(7)(C)(ii).  In fact, the CFPB is responsible for formulating a model disclosure that furnishers can use to provide the notice of negative credit reporting.  Id. at § 1681s-2(a)(7)(D). Thus, Congress has already determined that it is important for consumers to be informed about negative information that is being furnished about them, and the CFPB is in charge of crafting a model notice so furnishers can get the word out to consumers.

            In its Bulletin issued in July 2013, the CFPB took the position that creditors, debt buyers and third-party collectors often make representations to consumers about credit-related issues in order to persuade them to pay.  These include statements suggesting that paying their debts might improve their credit report, their credit score, or their creditworthiness, or that payments may increase the likelihood that the consumer will receive credit or more favorable credit terms.  The Bureau pointed out that consumers often “view credit reporting as an important determinant of their future access to credit and other opportunities” and that representations made by collectors about credit “may be deceptive under the FDCPA, the Dodd-Frank Act, or both.”  According to the CFPB, “in light of the numerous factors that influence an individual consumer’s credit score” payments made to a collector or creditor “may not improve the credit score of the consumer to whom the representation is being made.”  In addition, given the “variety of sources of information to assess the creditworthiness of prospective borrowers,” the Bureau asserted that “debt collectors may well deceive consumers if they make representations about the nature or extent of improved creditworthiness that result from paying debts in collection.”  For these reasons, the CFPB outlined its expectation that “debt collectors should take steps to ensure that any claims that they make about the effect of paying debts in collection on consumers’ credit reports, credit scores, and creditworthiness are not deceptive” and the Bureau made it clear that it would be looking at these issues closely in connection with its supervision activities and enforcement investigations.

            The CFPB’s position, however, appears to be directly at odds with decisions issued over the past few decades by courts from around the country.  Courts at both the circuit court level and the district court level have repeatedly recognized that when consumers pay their debts, this is likely to improve their credit.  The courts have also held that collectors can, and probably should, remind consumers of this fact in order to encourage them to pay.  

             For example, the Ninth Circuit recognized that a collector could “properly” notify a consumer that nonpayment of a debt “could adversely affect her credit reputation” in Wade v. Regional Credit Ass’n., 87 F.3d 1098 (9th Cir. 1996).  There, the collector sent a letter stating “if not paid TODAY, it may STOP YOU FROM OBTAINING credit TOMORROW.  PROTECT YOUR CREDIT REPUTATION.  SEND PAYMENT TODAY . . . DO NOT DISREGARD THIS NOTICE.  YOUR CREDIT REPUTATION MAY BE ADVERSELY EFFECTED.”  Id. at 1099.  The Ninth Circuit rejected the consumer’s claim that the letter violated sections 1692e, 1692e(5) and 1692e(10) of the FDCPA, noting that: “The body of the notice was informational, notifying Wade that failure to pay could adversely affect her credit reputation… .The least sophisticated debtor would construe the notice as a prudential reminder, not as a threat to take action. . .The notice told Wade correctly that she had an unpaid debt, and properly informed her that failure to pay might adversely affect her credit reputation.” Id. at 1100.

             Similarly, the Seventh Circuit observed that it was entirely proper for the collector to “encourage debtors to pay their debts by informing them of the possible negative consequences of failing to pay” in Durkin v. Equifax Check Services, Inc., 406 F.3d 410, 418 (7th Cir. 2005).  There, the collector’s letter told the consumer that “CONTINUED REFUSAL TO HONOR THIS RETURNED CHECK WILL RESULT IN YOUR CREDIT FILE BEING IMPACTED WITH A NEGATIVE REFERENCE WHICH MAY IMPACT FUTURE CREDIT GRANTING DECISIONS.”  Id. at 425.  The Court rejected the consumer’s FDCPA claim, stating that such language would not only “promote payment of valid debts” it also “promotes disclosing genuine claims of invalid debts . . . . Undeniably, one way to encourage someone with a true dispute to come forward and resolve that dispute is to inform him of the possible negative consequences of his continued inaction.  Promoting final resolution of such matters, either way, is inherently beneficial.”  Id. at 418, n. 7.

             More recently, the Fifth Circuit embraced the reasoning of Durkin in the case of McMurray v. ProCollect, Inc., 687 F.3d 665 (5th Cir. 2012).  There, the collector’s letter warned the consumer of the negative consequence of nonpayment as follows: “ It is important that you pay your debt as failure to timely validate the referenced amount due will cause us to report your account to the credit reporting agencies.  The negative mark can remain on your credit for up to seven (7) years, and may among other things significantly affect your ability to: (1) OBTAIN CREDIT; (2) OBTAIN EMPLOYMENT; (3) PURCHASE HOME OR CAR; OR (4) QUALIFY FOR APARTMENT RENTAL.”  Id. at 667.  The Fifth Circuit rejected the consumer’s argument that this language amounted to a “threat” that overshadowed the validation notice in violation of section 1692g of the FDCPA: “The supposed threat falls in the category of letters that encourage debtors to pay their debts by informing them of the possible negative consequences of failing to pay, words that do not overshadow the required notice language. . . The letter in this case essentially provided such warnings and nothing more.  Thus, the notice language in ProCollect's letter is not overshadowed by the letter's bad-credit warnings.”  Id. at 671 (citations and quotation marks omitted).

             During the past three decades, district courts from around the country have repeatedly held that collectors may properly inform consumers about adverse credit consequences resulting from their failure to pay.  See, e.g., Wright v. Credit Bureau of Georgia, 555 F. Supp. 1005 (N.D. Ga. 1983) (“If the defendants' letters contain any threat to a consumer's credit rating, the threat is at most a statement that the results of the defendants' collection efforts may some day affect the debtor's credit rating.  Thus the letters convey no specific threat greater than the well-known fact, recognized by all consumers, regardless of the degree of their sophistication, that a failure to pay one's bills will affect his ability to obtain credit in the future. Such a threat does not violate the FDCPA.”); White v. Financial Credit Corp., 2001 WL 1665386, at *5 (N.D. Ill. Dec. 27, 2001) (letter offering to “amend your credit report” did not violate section 1692e of the FDCPA); Hogan v. MKM Acquisitions, LLC, 241 F. Supp. 2d 896 (N.D. Ill. 2003)(letter offering to “improve” the consumer’s credit rating did not violate the FDCPA:  “Even an unsophisticated debtor should realize that the fewer delinquent notices on one's credit report, the better one's credit rating will be.”); Jones v. CBE Group, Inc., 215 F.R.D. 558, 566 (D. Minn. 2003) (“Adverse credit reporting is one the debt collector's most important inducements to prompt payment.  But the opportunity to avoid a negative credit report is also a significant benefit to debtors.”); Hapin v. Arrow Financial Services, 428 F. Supp. 2d 1057 (N.D. Cal. 2006) (letter “correctly informed” debtors that “paying their obligations might ‘help regain [their] financial future’” and did not violate FDCPA); Kimmel v. Cavalry Portfolio Services, LLC, 2011 WL 3204841 (E.D. Pa. July 28, 2011) (letter stating that payment would help debtor get back on the road to financial recovery did not violate FDCPA:  “…Defendant's comments about improving Plaintiff's financial situation merely underscored the fact that if Plaintiff accepted Defendant's settlement offer, the debt associated with his Bank of America account would be eliminated. There is nothing deceptive about this statement.”); Hartley v. Suburban Radiologic, 295 F.R.D. 357 (D. Minn. 2013) (letter stating that the alternatives available to the collector  “should you not clear this obligation may include damage to your credit rating” was an “an accurate statement of the possible outcomes of failing to respond” to the letter); Erickson v. Performant Recovery, Inc., 2013 WL 3223367 (D. Minn. June 25, 2013) (statement that debtor’s credit “was so ruined by this debt that” the debtor “couldn't even buy an apple” not actionable under the FDCPA: “Simply expressing an opinion about someone's credit score as a consequence of unpaid debts is not material to the collection of the debt.”).

             Would the CFPB approve of the use of the letters that each of these courts has found to be lawful?  It is hard to say.  We know that Congress believes it is important for consumers to know when negative information has been reported about them to the consumer reporting agencies.  It is difficult to reconcile the CFPB’s stern warnings in its July 2013 Bulletin with the reasoning employed by the courts that have held that debt collectors can and should inform consumers that their failure to pay their debts could impact their credit. 

Can Recent Enforcement Actions Provide Guidance On The CFPB’s Position On UDAAPs?

           The Dodd-Frank Act gave the Consumer Financial Protection Bureau (“CFPB”) sweeping authority to prohibit the use of “unfair, deceptive or abusive” acts or practices (“UDAAPs”) in connection with the collection of consumer debts.  These terms are broadly defined to provide the CFPB with maximum flexibility when carrying out its consumer protection mission.  But how can a collector know exactly what the CFPB will consider to be an “unfair” or “deceptive” or “abusive” collection practice?   The CFPB has provided some guidance on UDAAPs in the bulletin it released in July 2013 and in the Examination Manual that it published in 2012.  Beyond this, debt buyers and other collectors can read the UDAAP tea leaves by examining the recent enforcement activity of the CFPB and other regulators.

            First, we should start with the UDAAP definitions.  An act or practice will be considered “unfair” if the CFPB finds that it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers” and “such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”  See 12 U.S.C. § 5531(c)(1).  To determine if an act or practice is “unfair” the CFPB “may consider established public policies” but they “may not serve as a primary basis for such determination.”  Id. at § 5531(c)(2).

            An act or practice will be considered “abusive” if the CFPB finds that it “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service” or it “takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service” or “the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service” or “the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”  Id. at § 5531(d).

            An act or practice will be deemed “deceptive” if the CFPB find that it “(1) misleads or is likely to mislead the consumer; (2) the consumer’s interpretation is reasonable under the circumstances; and (3) the misleading act or practice is material.”  See CFPB Bulletin 2013-07, July 10, 2013, Prohibition of Unfair, Deceptive, or Abusive Acts or Practices In The Collection Of Consumer Debts, at p. 3.  The CFBP will consider “the totality of the circumstances” when determining if an act or practice has actually misled or is likely to mislead a consumer, and it will look at implied representations as well as omissions.  Id.  The standard for “deceptive” used by the CFPB under the Dodd-Frank Act will be “informed by the standards for the same terms under Section 5 of the FTC Act.”  Id. at n.16.  If a representation conveys more than one reasonable meaning to consumers, one of which is false, then it may be misleading.  Id. at p. 4. “Material” information is that which is “likely important to consumers” and that “is likely to affect a consumer’s choice of, or conduct regarding, the product or service.” Id. 

             With definitions this broad, it can be difficult for collectors to anticipate what conduct might be considered to be a UDAAP.  One method for identifying areas of potential concern, however, is to analyze the recent enforcement actions by the CFPB and other regulators filed against debt buyers and original creditors.  

             The most comprehensive enforcement action against a debt buyer in recent years was brought by the FTC, not the CFPB.  On January 30, 2012, the FTC entered into a Consent Decree with Asset Acceptance, LLC (“Asset”) relating to its allegedly false, deceptive and misleading debt collection and credit reporting practices. 

             A major focus of the Asset Consent Decree was the concern over the accuracy and reliability of the data underlying Asset’s accounts.  Asset agreed that it would not to make any material representation that a consumer owed any debt unless it had a reasonable basis for making the representation.  Asset agreed that it could reasonably rely on the information provided by original creditors, unless there was a “reasonable indication” – after taking into account the reliability and source of the information – that the information is incomplete, inaccurate, unreliable or that it does not substantiate the claim.  Should Asset discover that the information regarding a specific portfolio of accounts may be unreliable or inaccurate or missing material information, it agreed to terminate collection efforts on the entire portfolio until it conducts a reasonable investigation.  Factors that may call into question the accuracy of a portfolio of accounts include a disproportionately high rate of consumer disputes, lack of availability of documentation, a disproportionately high rate of missing data relating to the accounts in the portfolio, or any other information learned about the credit originator or its methods of doing business that calls into question the accuracy or completeness of the account data.

             Consumer complaints were also a major focus of the Asset Consent Decree.  If a consumer, at any time, questions, disputes or challenges the accuracy or completeness of the information that Asset is relying on, Asset agreed either to close the account permanently and request deletion of the tradeline, or to report the account as disputed and conduct a complete and reasonable investigation into the dispute. 

             The Asset Consent Decree also reflects the FTC’s hostility to collecting time-barred debts.  If Asset knows or should know the debt has passed the applicable statute of limitations for litigation, it agreed to provide the consumer with a new notice stating:  “The law limits how long you can be sued on a debt.  Because of the age of your debt, we will not sue you for it.  If you do not pay the debt, we may continue to report it to the credit reporting agencies as unpaid.”  If the obsolescence period for reporting the debt to consumer reporting agencies has also expired, Asset will provide a notice stating:  “The law limits how long you can be sued on a debt.  Because of the age of your debt, we will not sue you for it, and we will not report it to any credit reporting agency.”  In addition to these notices, Asset agreed to provide consumers with a lengthy new notice on each written communication that summarizes their rights under the FDCPA.  Finally, the Consent Decree provides that Asset will pay a civil penalty of $2.5 million to the FTC.

             Enforcement actions filed against original creditors can also provide guidance to debt buyers and other collectors about areas of CFPB concern.  For example, service provider practices were a major focus of the July 18, 2012 Stipulation and Consent Order between the CFPB and Capital One Bank, (USA) N.A. (“CapOne”) which related to allegedly deceptive practices in the sale of payment protection and credit monitoring products made by CapOne’s service providers during the card activation process.  The CFPB charged that CapOne violated section 5536 of the Dodd-Frank Act when call center representatives employed by CapOne’s service providers deviated from the call scripts, or misinterpreted them, while explaining the products to consumers, and that ‘ineffective oversight” by CapOne had resulted in the failure to detect and prevent these improper sales practices.  Among other things, CapOne agreed to implement a new “Bank Service Provider Management Policy” which, at a minimum, will require: 1) that CapOne assess, before entering into any contract, whether a service provider has the capacity to comply with all consumer protection laws, 2) that CapOne have contracts that require service providers to train their employees on CapOne’s policies and applicable consumer protection laws, and that allow CapOne to terminate the agreement for noncompliance, and 3) that CapOne conduct periodic onsite reviews of the service providers’ controls, performance and information systems.  CapOne agreed to reimburse approximately $140 million to its customers and to pay a $25 million penalty to the CFPB.

             Credit reporting practices, service provider oversight and time-barred debts were a focus of the October 2012 Consent Order between the CFPB and American Express Centurion Bank, Salt Lake City, Utah and American Express Bank, FSB (“Amex”) which related to allegedly unfair, deceptive and abusive practices engaged in by Amex in violation of sections 5531 and 5536 of the Dodd-Frank Act.  The CFPB claimed that Amex had misrepresented to certain consumers that the payment of their debts could improve their credit scores, despite the fact that Amex was not reporting those debts to the consumer reporting agencies.  Amex also allegedly failed to report certain consumer disputes to the consumer reporting agencies.  The CFPB claimed that Amex had failed to implement an effective employee training program regarding applicable consumer protection laws, and had failed to adequately monitor consumer complaints.  According to the CFPB, Amex had failed to properly manage its service providers, who had committed the alleged violations.

             Amex agreed to “continue to provide disclosures concerning the expiration of the Bank's litigation rights when collecting debt that is barred by applicable state statutes of limitations.”  In addition, when collecting on obsolete debt, Amex agreed to provide a new disclosure which states: “The law limits how long a debt can be reported to a consumer reporting agency.  Because of the age of your debt, we cannot report it to a consumer reporting agency.  Payment or non-payment of this debt will not affect your credit score.”  If Amex sells any time-barred or obsolete debt, it must require the buyer to provide consumers with the same disclosures.  Amex agreed to pay $85 million of restitution to cardholders, $14.1 million of civil penalties to the CFPB, and to substantially revise its Compliance Risk Management Program. 

             Telephone harassment, consumer disputes and voice mail messages were a focus of the July 9, 2013 Stipulated Order For Permanent Injunction and Monetary Judgment between the FTC and Expert Global Solutions, Inc., f/k/a NCO Group, Inc. (“NCO”).  NCO agreed that there would be a rebuttable presumption that it intended to annoy, abuse or harass a person if it placed more than one call to any person about a debt after that person had notified NCO “either orally or in writing” that the person refused to pay or wanted NCO to cease further communication.  NCO also agreed not place calls to any telephone number about a particular account if NCO had already been informed by anyone at that number that the debtor cannot be reached at that number or the person does not have location information about the debtor.

             If at any time any person “denies, disputes or challenges” NCO’s claim that they owe a debt, NCO must, within fourteen (14) days, report the debt as disputed to the consumer reporting agencies, or request deletion of the reporting concerning the account.  In addition, following any such dispute, NCO must commence and complete an investigation within thirty (30) days.  If NCO concludes that the consumer owes the debt, it must within fifteen (15) days provide the consumer with verification of the debt, and inform the consumer of NCO’s conclusion and the basis for it.  If NCO concludes that the consumer does not owe the debt, it must within fifteen (15) days inform the consumer of this conclusion, request deletion of the tradeline, cease collection efforts and not sell or transfer the debt.

             Regarding voicemails, NCO agreed that it would not leave any voicemail message that states the first or last name of the debtor and that NCO is a debt collector attempting to collect a debt, or that the debtor owes any debt, unless 1) the greeting on the voicemail includes a first and last name that is the same as the debtor, or 2) NCO has already spoken to the debtor using the phone number associated with voicemail.

             NCO also agreed to provide a new notice to consumers on each written communication sent to collect a debt, as follows: “Federal and state law prohibit certain methods of debt collection, and require that we treat you fairly.  If you have a complaint about the way we are collecting your debt, please visit our website at www.ncogroup.com or contact the FTC online at www.FTC.gov; by phone at 1-877-FTC-HELP; or by mail at 600 Pennsylvania Ave, NW, Washington, DC 20580.  If you want information about your rights when you are contacted by a debt collector, please contact the FTC online at www.ftc.gov.”  NCO also agreed to judgment for a civil penalty totaling $3.2 million.

             Collection litigation practices were the focus of the September 18, 2013 Consent Order between the Office of the Comptroller of the Currency (“OCC”) and JPMorgan Chase Bank, N.A., JPMorgan Bank and Trust Company, N.A., and Chase Bank USA, N.A. (“Chase”).  The OCC alleged that Chase had engaged in “unsafe or unsound banking practices” by, among other things, 1) filing affidavits where the affiant made claims that were not based upon personal knowledge or a review of relevant business records, 2) obtaining judgments based on false affidavits with financial errors in favor of Chase, 3) filing documents that were not properly notarized, and 4) failing to implement policies and procedures to properly oversee internal and external collection litigation processes.  Chase agreed to implement a new Collections Litigation Plan to address the deficiencies in the Bank’s internal collection litigation practices.  When using any third party providers in connection with collection litigation, including law firms, Chase agreed to implement policies and procedures to ensure that the third parties comply with all legal requirements and OCC guidance.  In addition, when selling debt, Chase agreed to ensure that it complies with the OCC’s guidance on debt sales, including conducting due diligence on all debt buyers to evaluate their past and future performance in complying with consumer protection and debt collection laws.

             Robo-signing was a focus of the November 20, 2013 Consent Order between the CFPB and Cash America International, Inc. (“Cash America”).  The Consent Order related in part to the allegedly unfair, deceptive or abusive debt collection practices in violation of section 5531 and 5536 of the Dodd-Frank Act by its Ohio-based subsidiary, Cashland Financial Services, Inc. (“Cashland”).  According to the CFPB, between January 2008 and September 2012, legal assistants employed by Cashland were manually stamping the signatures of managers or attorneys on debt collection affidavits or pleadings without prior review of those affidavits or pleadings by the manager or attorney.  In addition, legal assistants were allegedly notarizing certain debt collection documents without following the procedures required by applicable notary law.  The CFPB found these practices were “unfair” because they “could potentially cause consumers to pay incorrect debts or legal costs and court fees to defend against invalid or excessive claims” and that they were “deceptive” because they were likely to mislead consumers “into believing that the affidavits or other court filings were reviewed, executed, and notarized in compliance with applicable law and this information was material to consumers subject to debt collection litigation.”  According to the CFPB, Cash America had failed to conduct adequate internal compliance audits and had therefore failed to prevent or detect the improper conduct in a timely manner.  Cash America paid $8 million to affected consumers, a $5 million civil penalty to the CFPB, and agreed to implement a comprehensive Compliance Plan designed to ensure compliance with applicable consumer financial laws.

             While it is impossible to predict what the CFPB might consider to be a UDAAP in the future, these recent enforcement actions – which have focused on data integrity, consumer disputes, service provider oversight, time-barred and obsolete debt, telephone harassment, voice mail messages and robo-signing practices – can provide guidance on areas of potential concern.