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.