The Consumer Financial

Protection Bureau 

DFW Area Chapter 13 Seminar 

October 23, 2017
                                                                

CFPB Resources:  http://www.consumerfinance.gov/

Consumer Tools; Educational Resources; Data & Research; Policy & Compliance

·        Complaint portal: http://www.consumerfinance.gov/complaint/

·        Help for Students: http://www.consumerfinance.gov/students/

·        Information for Service-members & Veterans: http://www.consumerfinance.gov/servicemembers/

·        Consumer Complaint Database: http://www.consumerfinance.gov/data-research/consumer-complaints/

·        Payments to harmed consumers: http://www.consumerfinance.gov/about-us/payments-harmed-consumers/

·        Compliance and Guidance: http://www.consumerfinance.gov/policy-compliance/guidance/

·        Debt Collection information: http://www.consumerfinance.gov/consumer-tools/debt-collection/

What Is the CFPB, and Why Should You Care?

The Bureau’s Reach Extends Beyond Consumer Advocacy[1]

By Alane A. Becket and William A. McNeal[2]

     As most practitioners are likely aware, on July 21, 2010, President Barack Obama signed into law the Dodd Frank Wall Street Reform and Consumer Protection Act[3] (the “Dodd-Frank Act”). The Dodd-Frank Act was conceived “to promote the financial stability of the U.S. by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”[4]

     According to President Obama, the Dodd-Frank Act is intended to “rein ... in the abuse and excess that nearly brought down our financial system ... [and] bring transparency to the kinds of complex and risky transactions that helped trigger the financial crisis.” It also aimed to end “tax-funded bailouts ... for Wall Street’s mistakes” and provide “the ability to wind ... down [a failed large financial institution] without endangering the broader economy ... [a]‌nd ... make [it] clear that no firm is somehow protected because it is ‘too big to fail.’”[5] The Dodd-Frank Act further authorizes the Secretary of the Treasury to implement programs and provide funding to enhance access to mainstream financial institutions for lower- and middle-income consumers.[6] These provisions are designed, in part, to provide alternatives to higher-cost products, which are often a consumer’s only option.

     Most relevant to the average American, the Dodd-Frank Act also authorized the formation of the Bureau of Consumer Financial Protection (CFPB),[7] whose mission is several-fold: “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.”[8] Notably and ironically, an often-overlooked objective of the CFPB is “to reduce unwarranted regulatory burdens.”[9] For consumers, the CFPB ensures that they “are provided with timely and understandable information to make responsible decisions about financial transactions” and “are protected from unfair, deceptive, or abusive acts and practices and from discrimination.”[10]

The CFPB’s Broad Powers Defined

     To accomplish its assigned purposes and goals, the CFPB conducts financial education programs; collects, investigates and responds to consumer complaints; collects, researches, monitors and publishes information that is relevant to the functioning of markets for consumer financial products and services in order to identify risks to consumers, and to the proper functioning of those markets; supervises covered persons within the CFPB’s statutory ambit for compliance with federal consumer financial law; and takes appropriate enforcement action to address violations of federal consumer financial law.[11]

     The CFPB’s director “may prescribe rules and issue orders and guidance as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.”[12] This empowers the CFPB to issue regulations under a host of Federal consumer protection statutes, including the Fair Debt Collection Practices Act (FDCPA), Fair Credit Reporting Act, Equal Credit Opportunity Act, Home Ownership and Equity Protection Act, Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA), among others.[13]

     More generally, the CFPB “may take any action ... to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice [UDAAP] under Federal law 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.”[14] The term “abusive” was added to the traditional concept of UDAP (unfair or deceptive act or practice) and is defined as an act or practice that:

(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.[15]

     What is unfair or deceptive has traditionally been subject to interpretation by courts; however, the Dodd-Frank Act provides the CFPB with the power to apply its determination of the more muscular standard to the acts of supervised entities. The CFPB’s oversight of UDAAP is a significant tool and extends potential liability to persons who might be exempt from traditional consumer-protection laws, such as original creditors from the FDCPA.

     The CFPB discharges its express supervisory authority in several ways: by (1) issuing civil investigation demands when it suspects that a violation has occurred; (2) directing examinations of supervised entities, either on site or by deposition; or (3) enforcement actions and consent orders. Consent orders, which outline that a supervised entity has agreed to, among other things, a course of future conduct, signal the CFPB’s expectations for other supervised entities. In addition, the CFPB has forecasted its expectations and issued warnings, through dozens of bulletins, white papers, research and examination manuals that enable it, in part, to instigate policy without formal rule-making or legislation. It is under this circumstance that the CFPB has dictated numerous guidelines in advance of issuing formal rules.[16]

     The CFPB has also been very active and aggressive in carrying out its duties. For example, it announced in 2014 its well-publicized Mortgage Servicing Rules, which were subsequently amended later that year. The Mortgage Servicing Rules amended Regulations B, X and Z to require, among other things, that a lender perform a good-faith ability-to-pay analysis; provide certain information requested by such borrowers; and afford protections to such borrowers in connection with force-placed insurance and impose obligations on servicers to correct errors asserted by mortgage loan borrowers.

     The Mortgage Servicing Rules further required servicers to establish certain policies, procedures and requirements — including the designation of personnel to assist consumers who fall behind in their mortgage payments — and contact consumers soon after delinquency and work with them for consideration for applicable loss-mitigation options. They also impose restrictions on loan originators, specifically regarding registration and licensing, compliance procedures, compensation and record-keeping.

     The CFPB’s rule-making power generally supersedes that of other agencies and courts,[17] and for the most part, they must defer to the CFPB exclusively.[18] However, the authorities of the CFPB and Federal Trade Commission are co-existent and equivalent, if not coequal,[19] and they are required to coordinate their rule-making activities.[20]

Whom Does the CFPB Supervise?

     The CFPB is specifically charged with supervising any residential mortgage originator, broker or servicer; private student lender; and payday lender, as well as “larger market participants” (as defined by the CFPB).[21] It is further authorized to supervise, examine and take enforcement action against other “covered persons,” generally defined as any entity providing consumer financial products or services, and their affiliated service providers.[22]

     In addition, the CFPB has authority over “very large banks, savings associations, and credit unions,” which are defined as those with assets exceeding $10 billion.[23] In regard to smaller banks and credit unions, the CFPB may require their cooperation and information in order to assess and detect risks to consumer financial markets, although enforcement authority against these entities remains with the prudential regulator.[24]

     Importantly for consumer finance professionals, the CFPB’s authority extends to “service providers,” defined as “any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service.”[25] Any “service provider” representing a “substantial number” of smaller entities is also subject to supervision.[26] This power extends the reach of the CFPB’s supervision and enforcement powers far beyond traditional consumer financial service providers.

     In support of its power to issue rules and other forms of guidance to implement, administer and enforce consumer financial law,[27] the CFPB has the right and duty to monitor covered persons by occasionally “gather‌[ing] information ... regarding the organization, business conduct ... and activities of covered persons and service providers,”[28] a function that consumes much of the CFPB’s energies, and it may require covered persons to furnish such information. In addition to informal or administrative requests, the CFPB has the right to subpoena witnesses and things for hearings, and, if a violation of any consumer law is suspected, a civil investigative demand may be issued requiring the entity to produce documents, file reports, answer questions, give testimony or any combination thereof.[29] If warranted, the CFPB may litigate violations of federal consumer financial law.[30]

     If found to be in violation of any federal consumer financial statute or rule, the CFPB has a host of available remedies, many of which it has vigorously applied in the five years since its inception. Remedies include — but are not limited to — rescission or reformation of contracts, refunds, restitution, monetary damages, limits on the activities of the violator and civil penalties.[31]

What Should One Expect When Being Monitored by the CFPB?

     In 2012, the CFPB issued its Supervision and Examination Manual[32] to assist its investigators in examining entities when performing its routine monitoring functions, or when an entity is suspected of violating consumer finance laws. The Manual, at almost 1,000 pages, is exceedingly thorough and addresses examinations based on type of entity, financial product or consumer financial regulatory statute. Since its release, the Manual has been supplemented to update examination procedures and add procedures related to specific activities, such as debt collection, auto finance and education lending. It not only assists examiners in planning for and conducting exams, but is a road map for supervised entities preparing to meet the CFPB’s expectations.

     Supervision is consumer-focused and data-driven. An examination begins with a review of publicly available information about the entity in order to assess risk and set the scope and parameters of the examination. Each depository institution is assigned a lead examiner, who performs continuous monitoring (i.e., at least quarterly) after the initial examination. An assessment is made based on the inherent risks posed by the products and services provided by the institution and the controls that it employs to manage those risks. A nonbank supervised entity is selected for examination based on its size, assessed risk, volume of consumer transactions and oversight by other regulators. A directional risk is assigned to the institution, viz. increasing, decreasing or stable.

     After the level of risk has been assessed, the entity is then scheduled for an on-site review. Guided by the risk assessment, every examination will include a review of compliance management and practices to identify any that are potentially unfair, deceptive or abusive. For entities engaged in lending activities, a review for discrimination is also performed.

     Examinations focus on an entity’s (1) compliance management; (2) product-based procedures (consumer-reporting larger participants, mortgage origination, mortgage servicing, and short-term, small-dollar lending); and (3) statutory and regulatory procedures (including UDAAP, Equal Credit Opportunity Act, Home Mortgage Disclosure Act, TILA, RESPA, Homeowners Protection Act, Consumer Leasing Act, Secure and Fair Enforcement for Mortgage Licensing Act, Fair Credit Reporting Act, FDCPA, Electronic Fund Transfer Act, Truth in Savings Act, and Privacy of Consumer Financial Information (also known as the “Gramm-Leach-Bliley Act”)). Examiners are thorough and expect prompt, written, clear, comprehensive and continuously updated policies and procedures, as well as demonstrable evidence of an entity’s understanding and communication of, and monitoring for compliance with, articulated policies.

     After the examination is complete, a compliance rating on a scale of one (strong compliance position) to five (in need of strongest supervision) is assigned. Ratings are based on the entity’s compliance system, management’s ability to monitor for compliance, policies and procedures that are in place, the identification and communication of changes in the law and resultant changes in the compliance program, staff training, an identification of internal compliance violations and remediations, and evidence of any discriminatory practices. A report is prepared, including the rating, a discussion of major strengths and weaknesses, and any required corrective actions. The final report is shared with any governing prudential regulator. If an entity receives an unsatisfactory rating or an enforcement action is recommended, the CFPB will meet with an entity’s directors or principals and perform follow-up assessments to gauge remediation and ongoing compliance.

Why Should You Care?

     Lest there be any doubt about the CFPB’s institutional fervor, consider its own words as emblematic of its intentions, activism, diligence and even (according to a few) regulatory ferocity:

Since 2011, we have secured over $10.8 billion ... in relief for more than 25 million consumers harmed by illegal practices.

We’ve taken several actions against mortgage-servicing companies for failing to tell borrowers when their loan-modification applications were incomplete, denying loan modifications to qualified borrowers, failing to honor modifications for loans transferred from other servicers, and illegal foreclosure practices.

We have also taken action against companies in the mortgage industry for steering consumers into costlier loans, for paying illegal kickbacks in exchange for business, and for making inadequate disclosures or using deceptive ads. We’ve secured billions of dollars of relief for millions of consumers harmed by deceptive marketing and enrollment of credit card add-on products, unfair billing, and illegal debt-collection practices.

We have taken action against payday lenders and installment lenders for unlawful lending and collections practices that include using false threats of lawsuits or criminal prosecution to collect debts, charging undisclosed fees to servicemembers, and robo-signing court documents related to debt-collection lawsuits.[33]

     For the individual consumer heretofore victimized by unscrupulous financial services providers, the CFPB’s activism is a welcome respite from feelings of oppression and helplessness. For the young and very modestly paid soldier, sailor, airman or marine taken in by dishonest auto finance or payday lenders, and harassed by high-pressure collection tactics laced with threats of exposure to the chain of command, the CFPB’s powers are a salvatory port in the financial storm.[34]

            However, for a service provider or smaller entity, the CFPB’s overzealous and heavy-handed regulatory tactics, arising out of near limitless and sweeping powers conferred by broad enabling statutory language, could result in financial ruin. For low-income consumers, the CFPB’s policies may hamper their ability to obtain products and services that are needed but might not be available through traditional financing sources. Future installments will discuss these and other reasons why you should care.

CFPB’s Debt-Collection Proposals Spring No Surprises

By Alane A. Becket[35]

     In July 2016, the Consumer Financial Protection Bureau (CFPB) released its long-awaited outline of debt-collection proposals. “Today we are considering proposals that would drastically overhaul the debt collection market,” said CFPB Director Richard Cordray. “This is about bringing better accuracy and accountability to a market that desperately needs it.”[36]

     The process of formulating the proposals began with an advance notice of proposed rulemaking (ANPR) in November 2013.[37] The ANPR is used in the preliminary stages of rulemaking to collect information and as an invitation to participate in developing proposed rules. An initial public comment period followed during which interested parties provide data and commentary.

     The proposals under consideration by the CFPB address two perceived problems: (1) deficiencies in the quality and quantity of information that debt collectors receive at the placement or sale of a debt; and (2) a lack of critical elements in the initial debt-collection notices that would help consumers recognize the debt. To remedy these concerns, three categories of intervention are under consideration: information integrity; consumer understanding; and collector communications. This article summarizes some of the most salient proposals under consideration.

Information Integrity: Establishing the Validity of the Debt During Collections and Litigation

     The CFPB’s proposals provide intervals during the collection process at which time a collector must substantiate its claim, along with additional requirements for the transfer of information at various times in the process. “Substantiation” refers to having a reasonable basis for claiming that a particular consumer owes a particular debt. The CFPB suggests there is “fundamental information” that a collector may review that would establish a reasonable basis for the indebtedness:

• the consumer’s full name, last known address and last known telephone number;

• the consumer’s account number and debt owner at the time the account went into default;

• the date of default, the amount owed at default and the date and amount of any payment or credit applied after default;

• each charge for interest or fees imposed after default and the contractual or statutory source for such interest or fees; and

• the complete chain of title from the debt owner at the time of default to the collector.

     In addition to substantiation, the collector must have a representation of accuracy from the creditor as to the debt’s validity, described as “a written representation from the debt owner that it has adopted and implemented reasonable policies and procedures to ensure the accuracy of the transferred information and that the information is identical to the information in the debt owner’s records.” The collector must also establish an absence of “warning signs” that may indicate inaccurate information. Such warning signs might include the following:

• Information for an individual debt is not in a clearly understandable form;

• Information for an individual debt is facially implausible or contradictory;

• A significant percentage of debt in the portfolio has missing or implausible information, either in absolute terms or relative to portfolios with comparable types of accounts; or

• A significant percentage of debt in the portfolio has unresolved disputes, either in absolute terms or relative to portfolios with comparable types of accounts.

If the collector discovers warning signs during its initial review, it would be responsible for supporting its claims by obtaining and reviewing supplemental information from the creditor or prior collector or obtaining information from other sources such as data vendors:

A collector who has each of these specific elements (plus a representation of accuracy and no warning signs of problems) would have a reasonable basis for claims of indebtedness. A collector nevertheless [might] be able to acquire a reasonable basis without each specific element. However, the collector would bear the burden of justifying its alternative approach.[38]

     The proposals also require collectors to look for warning signs that may arise during the course of collection, which are most likely to be in the form of consumer disputes. The collector would again be responsible for responding to the warning signs that it detects or should have detected by taking steps such as reviewing its documentation in support of the claim before continuing collection efforts.

Substantiation after a Dispute

     A communication from a consumer is considered to be a dispute if it raises a question or challenge as to the validity of the debt, or to the collector’s legal right to seek payment. While a dispute is pending, contact with consumers by collectors is limited to requesting clarification of the dispute; requests for payment are prohibited.

     Disputes are broken down into four categories: (1) generic disputes (in which no reason or basis is provided by the consumer); (2) disputes as to amount of debt; (3) liability disputes; and (4) disputes over the collector’s right to collect on the debt. In the event of a dispute, and before proceeding with collection efforts, the collector must review documentation that is responsive to the dispute and conclude that it provides a reasonable basis for the claim by verifying a list of enumerated factual elements.[39]

Substantiation During Litigation

     The proposals would require that before litigation is commenced, collectors demonstrate reasonable support that the consumer owes the amount claimed and that the collector has a legal right to make the claim. Collectors could satisfy their obligations by obtaining and reviewing all of the documentation listed above for all types of disputes; collectors could also acquire support through alternative means, so long as they bear the burden of justifying an alternative approach.

Procedures Applicable When a Debt Is Transferred

     It is not uncommon for a debt to be assigned to more than one collection agency during its lifetime, and a common complaint from consumers is that relevant information is not transferred. The CFPB’s proposals include obligating prior collectors to transfer information obtained during collection activities to subsequent collectors at the time of the transfer and before the new collector initiates collection activities.  Information such as whether there were any prior disputes, attorneys representing the consumer, times and places known to be inconvenient for contacting the consumer, confirmed contact information for the consumer, disclosures already provided to the consumer, the consumer’s language preference, whether the consumer has requested that communications cease and so on must be passed along.

     Information regarding the consumer’s rights under other laws must also be transferred to a subsequent purchaser. This may include whether the consumer is an active-duty service member and whether he/she has secured an interest rate reduction pursuant to the SCRA. For defaulted student loans, this may include whether the consumer has applied for discharge of the debt on a basis that imposes a collections pause; for defaulted student loans eligible for rehabilitation, the terms of any rehabilitation agreement, the number of payments made and any requested adjustment to the amount of the monthly payment; and whether the consumer’s income and assets are exempt from garnishment under federal or state laws. Finally, information indicating that all or part of a debt might be uncollectible or lacks sufficient support must be transferred and would include, for example, identity theft reports, payments submitted by the consumer, bankruptcy discharge notices, and disputes, assertions or implications that assets are exempt from garnishment.

Consumer Understanding

     The CFPB is considering several initiatives designed to address areas where it believes consumers lack sufficient understanding, specifically regarding the validation notice,[40] litigation and time-barred debts.

The Validation Notice

     The proposals require validation notices to have enhanced and clarified information including fundamental information about the debt,[41] additional required explanatory statements regarding a consumer’s rights,[42] and a tear-off portion where a debtor can check a box to indicate the nature of a dispute.[43]

Non-English Language Notices

     Two alternatives being considered would require debt collectors to provide translated versions of the validation notice and statement of rights. One would require that translated versions be provided if the debt collector’s initial communication took place predominantly in a language other than English, or if the debt collector received information from the creditor or a prior collector indicating that the consumer prefers to communicate in a language other than English, and the CFPB has published versions of the validation notice and statement of rights in relevant non-English languages. The other alternative would simply require every collector to include a Spanish translation on the reverse side of every validation notice and statement of rights.

Credit Reporting

     The CFPB recommends addressing perceived harm to consumers caused by a debt being reported to a credit-reporting agency without their knowledge. The rationale is that a debtor may miss an opportunity to resolve the debt and perhaps improve his/her credit. Thus, the CFPB proposes prohibiting a debt collector from reporting information to a credit-reporting agency unless the collector has communicated with the consumer about the debt.

Litigation Notices

     A “litigation disclosure” would be required in any written or oral communications in which the collector represents an intent to sue. In addition to notifying that a court could rule against the consumer if he/she fails to defend the intended litigation, the disclosure would also explain that additional information about debt-collection litigation, along with contact information for legal-service programs, is available on the CFPB’s website and by calling its toll-free number. The disclosure would be required at the same time, and by the same medium, in which the collector represents an intention to sue.

Time-Barred and Obsolete Debt

     A disclosure would be required for communications related to time-barred debt consisting of a statement that because of the age of the debt, the debt collector cannot sue to recover it. The disclosure would be provided in the validation notice, in the first oral communication and possibly at additional intervals in which the collector requests payment.

     The CFPB is also considering prohibiting debt collectors from collecting on time-barred debts that can be revived under state law unless the debt collector waives the right to sue on the debt. Further, the CFPB is proposing that a debt collector be prohibited from accepting payment on such a debt until the collector obtains the consumer’s written acknowledgment of having received the disclosure. Finally, the CPFB is considering whether to require debt collectors to provide a disclosure on the validation notice, and possibly at additional intervals, informing the consumer of whether the debt is subject to being included on a credit report.

Collector Communication Practices

     Three categories related to collector communications are being considered for regulations: (1) contact frequency and leaving messages; (2) the time, place and manner of contacts; and (3) communications relating to decedent debt, although the proposals concerning decedent debt will not be covered for purposes of this summary. The complexity of these limits would present some of the most challenging aspects of the proposals.

Limited-Content Voicemails and Other Messages

     Collectors face a dilemma when a call is answered by voicemail. While the Fair Debt Collection Practices Act (FDCPA) requires a collector to identify itself in all communications, doing so could cause an inadvertent disclosure to a third party who hears the message. The CFPB is considering a proposal that would allow limited-content messages with the consumer if the message conveys only the individual debt collector’s name, the consumer’s name and a toll-free method that the consumer can use to reply.

Frequency of Contact

     The CFPB’s proposals would limit the overall frequency in which collectors may contact, or attempt to contact, consumers based on whether the collector has successfully established “confirmed consumer contact.” A “confirmed consumer contact” would exist when any current or previous collector verifies communication with the correct consumer. The contact caps under consideration would limit both successful and attempted contacts.

Time, Manner and Place Restrictions

     A consumer’s location affects the presumptively convenient times that a collector may contact a consumer. Consequently, the CFPB is considering a proposal specifying how a debt collector determines a consumer’s location when it has conflicting location information. Whether a communication is deemed sent at an unusual or inconvenient time would depend on the time that the message is available to the consumer in all of the locations in which the consumer may be found, based on the collector’s information.

     The proposals further specify certain locations triggering the FDCPA presumption that a place would be inconvenient for the consumer. A consumer would not have to state that the communication is inconvenient, but instead could simply state that the consumer is in one of the four specified presumptively inconvenient places to trigger the FDCPA’s restrictions: medical facilities, including hospitals, emergency rooms, hospices or other places of treatment of serious medical conditions; places of worship, including churches, synagogues, mosques or temples; places of burial or grieving, including funeral homes and cemeteries; and daycare or childcare centers or facilities. Although this proposal would not require a collector to undertake an investigation of the consumer’s location, the collector may not ignore information that it may have received about a consumer’s location. Additional requirements regarding contact locations are under consideration for service members in military combat zones and similar areas.

     The proposals state that collectors know or should know that a particular communication method is inconvenient if the consumer indicates so, either expressly or by implication. Further, they prohibit collectors from using an email address for debt collection that the collector knows or should know is related to the consumer’s workplace, unless the consumer specifically consented to contact at that email address.

Miscellaneous Provisions

Consumer Consent

     Consumers can waive certain restrictions mandated by the FDCPA by giving consent directly to the debt collector. The CFPB is considering proposals to clarify the parameters of such consent by requiring each collector to obtain its own consent directly from the consumer without relying on consent given to previous debt collectors or the creditor. It is also considering the requirement that collectors provide the consumer with clear and prominent oral or written disclosure of what the consent entails and how the consumer can revoke prior consent.

Transferring Debt to Certain Parties or under Certain Conditions

     The proposals under consideration include a prohibition on debt buyers from placing debt with, or selling debt to, one who is prohibited from purchasing or collecting debt in the state where the consumer resides, or who is not licensed to purchase or collect debt in that state.

Recordkeeping

     A debt collector would be required to document its collection efforts and retain such documentation for three years after its last communication or attempted communication with the debtor. Such documentation would include all records relied upon for the information contained in the validation notice, the records supporting its claims and all records related to the collector’s interactions with the consumer (e.g., written and oral communications and the collector’s own notes). The recording of oral communications would not be required, but if such communications are recorded, those recordings would be subject to the applicable retention requirements.

Next Steps

     As required by the Small Business Regulatory Enforcement Fairness Act (SBREFA), when a rule under development may have a significant impact on small businesses, an agency must meet with a small business review panel in order to provide the affected small businesses with an opportunity to participate in the rulemaking process. Following release of the CFPB’s debt-collection proposals, a SBREFA meeting was convened in August 2016. The panel is required to submit a report on the input received from small-entity representatives within 60 days, although the report would not be made public until the CFPB issues its proposed rules.

     Notably, the proposals do not cover original lenders, but rather are limited (as is the FDCPA) to “debt collectors” as defined therein.[44] The CFPB expects to convene a second proceeding in the next several months for creditors and others engaged in collection activity who are covered persons under the Dodd-Frank Act, but who may not be “debt collectors” under the FDCPA.

     The CFPB’s direction does not come as a surprise to those following its activities over the past several years. Consent orders that the CFPB has already entered into with debt collectors and law firms — many containing the requirements for future conduct — were largely regarded as indicators of the CFPB’s expectations. The CFPB has been accused of “regulation by enforcement” during the rulemaking process in order to gain compliance before rules are finalized, thus prompting debt collectors to prepare for what they assumed was coming. Improved processes, enhanced collector training, and proactive partnering with lender clients to bring practices in line with the direction channeled by the CFPB through its white papers, bulletins, supervisory highlights and consent orders[45] has ultimately resulted in an improved, more transparent and nonthreatening experience for consumers.

Debt-Collection Lawyers Feel Grip of Limitless Federal Power[46]

By Alane A. Becket and William A. McNeal

The CFPB Takes Aim at Lawyers

     On July 14, 2014, the CFPB sued Marietta, Ga.-based firm Frederick J. Hanna & Associates PC, as well as three managing partners, in the U.S. District Court for the Northern District of Georgia.[47] The firm represents major national and international banks, as well as local financial institutions, principally in the area of recovery of outstanding receivables.[48] The CFPB accused the firm of “[u]‌sing high-volume litigation tactics ... [to] collect millions of dollars each year, often from consumers who may not actually owe debts or may not owe debts in the amounts claimed.”[49] According to the CFPB, the firm wrongfully “relie‌[d] on an automated system and non-attorney support staff to determine which consumers to sue ... [and to] produce the lawsuits and place them into mail buckets, which are then delivered to attorneys essentially waiting at the end of an assembly line ... [, who] are expected to spend less than a minute reviewing and approving each suit.”[50]

     The CFPB averred that the firm’s conduct violated the Fair Debt Collection Practices Act (FDCPA, 15 U.S.C. §§ 1692-1692p) and the Consumer Financial Protection Act of 2010 (CFPA, 12 U.S.C. §§ 5481-5603) for the “lack of meaningful attorney involvement in preparing and filing complaints; and [its improper] use of affidavits.” More specifically, the initiation of collection suits after allegedly insufficient attorney involvement in the review process violated the FDCPA’s bar against any false, misleading or deceptive misrepresentation, particularly any communication that comes from an attorney when it allegedly does not.[51] Also, the use of affidavits executed by persons allegedly lacking personal knowledge of the facts therein violated the FDCPA’s bar against the false representation of the character, amount or legal status of any debt. According to the CFPB, the CFPA was implicated through its general stricture against “any unfair, deceptive, or abusive act or practice.”[52]

     Hanna himself unsuccessfully moved to dismiss the complaint.[53] First, he argued that the CFPA prohibits the CFPB from “exercis‌[ing] 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.”[54] However, there are two exceptions to this exclusion,[55] and in a comprehensive analysis (addressing not only the statutory language but also case law, legislative history and policy purposes), the court determined that Hanna’s actions did not qualify under the “practice-of-law” exclusion. Specifically, the practice-of-law exclusion does not apply where the underlying claim is not based on the provision of legal advice or services to a consumer. Second, the CFPA explicitly placed FDCPA violations outside the protection of any practice of law exclusion: “Paragraph (1) 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.”[56]

     More generally, contrary to the argument that the regulation of the practice of law is the exclusive province of the states, the court pointed out that it is well established that the federal government regulates some aspects of such practice. In any event, circling back to its starting point, the court emphasized that unlike the circumstances in Hanna’s case law authority, the relevant statute in this matter explicitly provides for the regulation of activities that fall within the ambit of the practice of law.

     Next, the court addressed — and rejected — Hanna’s constitutional defenses. First, the court found that the law refused to extend the Noerr-Pennington doctrine to immunize a litigating attorney/debt collector from an FDCPA-based claim.[57] Second, the court rejected Hanna’s equal-protection challenge, particularly its insistence on a strict scrutiny standard of review. Instead, the court determined that Hanna had not shown that its clients’ interests were more constitutionally significant to a debtor’s, protected by rational basis review.[58]

     The court then approved the CFPB’s claim that the firm’s routines violated the FDCPA’s prohibition against false, deceptive or misleading representations, apparently by accepting as prima facie evidence from statistics about the volume of litigation actions that the suits lacked any meaningful attorney involvement, and extending that concept from its arguably traditional letter communications application to the filing of suits.[59] The court found that Hanna’s complaints, indisputably communications, falsely led a consumer to believe that an attorney had reviewed his/her account and assessed the creditor’s position.[60] According to the court, there was a risk that the suit would be legally or factually unsupportable, but would nevertheless coerce, by its intimidating adversarial nature, repayment of an otherwise unenforceable debt (or acquiescence by default). In addition, the lack of a definitive standard for meaningful attorney involvement was no handicap because its application, in letters and suits, was dependent on the facts of a specific case, nor, the court opined, was the test fatally flawed for being too vague.

     Finally, the court addressed three procedural questions regarding Hanna’s use of affidavits executed by persons allegedly lacking personal knowledge of the facts therein. First, it determined that such a claim does not need to meet the more rigorous standards that federal procedural rules require of a claim of fraud. Second, it denied Hanna’s defense that the claim was not plausible. On the contrary, determined the court, the sheer volume and scanty documentation of the debts purchased by Hanna’s clients made it very plausible that those who signed the affidavits lacked requisite personal knowledge of the assertions that they made, and that Hanna should reasonably have known this fact. Finally, the court declined to rule on a dispute over which statute of limitations should apply.

CFPB Wins, Even When There’s No Race

     For reasons known only to themselves (but plausibly to avoid the crippling expense of defending against a combative government agency armed with vast regulatory powers, dauntingly substantial political support and virtually limitless taxpayer-funded resources), Frederick J. Hanna & Associates and its principals settled the case with the CFPB.[61] To do so, the firm was forced to make sweeping concessions regarding the conduct of its representation of its clients’ collection cases. These include a requirement to possess extensive and detailed debt account documentation;[62] thorough documentation of the commercial travel (viz., each sale of the account from one debt-buyer to the next) of the account; a specific record of an attorney’s actual review of the details of each account and its applicable account agreement; a requirement for an attorney’s personal and actual review of any applicable statute of limitations; a requirement for an attorney’s personal and actual confirmation that the debt was not discharged in bankruptcy or is included in a pending petition; and a requirement for an attorney’s personal and actual confirmation of a debtor’s identity and address for determining correct venue. In addition, Hanna may not submit any affidavit that is not fully true and accurate, is not supported by actual detailed review of account documentation by the affiant and is not properly reviewed by the affiant. Not satisfied with the Hanna attorneys’ ethical and professional obligations to comply with any and all commitments and court orders, for all these requirements they must certify compliance in writing for each suit and affidavit.

     The Bureau extracted a $3.1 million penalty and substantially, even alarmingly, invasive personal information-disclosure requirements of the firm’s principals.[63] In addition, Hanna must annually report, in detail, its compliance.

Why Should You Care?

     As a general matter, federal legislators and regulators are apparently unimpressed with the regulation of attorneys’ conduct by their respective state and commonwealth supreme courts, bars and the solemnity of their oaths, and thus, the expansion of federal regulation of the practice of law. As a consequence, the CFPB will likely move against other firms for other practices that they deem unfair or impermissible. Unfortunately, the practice of debt recovery will remain a perilous minefield until the CFPB eventually and belatedly promulgates its debt-collection rules, which it has delayed.

     Until then, the CFPB will signal its intentions and view of the law by penalizing individual actors with expansive language. Consider the broad ambit of the language preceding the required relief in the CFPB’s settlement with Hanna, applying it to “[d]‌efendants and all other persons in active concert or participation with any of them who receive actual notice of this Order, whether acting directly or indirectly through Outside Counsel.” The CFPB has achieved the punishment of not only Frederick J. Hanna & Associates, PC and its three managing partners, but also of those who associated with them and, more alarmingly, those who might consider engaging the firm.[64]

     The warning signs seem clear. Documentation requirements have been expanded and are more onerous for creditors, debt buyers and their attorneys. Attorneys may not rely on, but take responsibility for, the services provided by their paraprofessional staff, including routine reviews of the federal judiciary’s case-management and docketing system. Instead, an attorney, properly admitted to his/her bar upon rigorous examination and oath, must personally read and review automated and tabular records regarding each of the many thousands of consumers who have not paid their debts, have filed bankruptcy petitions or both. Attorneys must ensure that affidavit evidence is demonstrably based on the affiant’s personal knowledge and review, as well as be accurate. Surprisingly, an attorney is now personally responsible and culpable for defects in the affidavit executed by a client.

     Exactly how it is possible that an attorney could police the quality and sufficiency of a client’s affidavit remains unclear. More practically, the inevitable result of this case, as with all new regulations, is an increase in the cost of attorney services and, consequently, a likely additional burden for consumers.

[1] Adapted from Alane A. Becket and William A. McNeal, What Is the CFPB, and Why Should You Care? The Bureau’s Reach Extends Beyond Consumer Advocacy, XXXIV ABI Journal 12, 16-17, 109, 111, December 2015

[2] The authors thank Joann Needleman of Clark Hill PLC for her assistance and advice in the preparation of this article.

[3] Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. 111-203, 124 Stat. 1376 (codified in scattered sections of 12 U.S.C., 15 U.S.C., 31 U.S.C., 7 U.S.C., 18 U.S.C., 42 U.S.C., 22 U.S.C. (as amended by Pub. L. 113-235, Pub. L. 113-250, Pub. L. 113-279)).

[4] Id.

[5] Statement by President Obama upon signing H.R. 4173, White House Press Release, July 21, 2010.

[6] See supra n.2.

[7] More commonly known as the Consumer Financial Protection Bureau.

[8] 12 U.S.C. § 5511(a).

[9] 12 U.S.C. § 5511(b)(3).

[10] 12 U.S.C. § 5511(b)(1), (2) (emphasis added).

[11] 12 U.S.C. § 5511(c).

[12] 12 U.S.C. § 5512(b)(1).

[13] 12 U.S.C. § 5481(12).

[14] 12 U.S.C. § 5531.

[15] 12 U.S.C. § 5531(d).

[16] For a list of guidance documents, see www.consumerfinance.gov/guidance/ (unless otherwise indicated, all links in this article were last visited on Nov. 3, 2015).

[17] 12 U.S.C. § 5512(b)(4)(A).

[18] 12 U.S.C. § 5512(b)(4)(B).

[19] 12 U.S.C. § 5581(b)(5). “Coequal” is a legal term coined, most relevantly, by the Supreme Court in describing the constitutional stature and powers of the three branches of the federal government. It denotes a degree of similarity or correspondence that exceeds mere “equivalent” but does not extend to the literal, quantitative “equal.”

[20] 12 U.S.C. § 5581(b)(5)(D).

[21] 12 U.S.C. § 5514. For example, in the consumer debt-collection market, a nonbank entity is considered a larger-market participant if its annual receipts from consumer debt collection are more than $10 million. See 12 C.F.R. 1090.105.

[22] 12 U.S.C. § 5481(6).

[23] 12 U.S.C. § 5515. For a current list of depository institutions under CFPB supervision, see files.consumerfinance.gov/f/201509_cfpb_depository-institutions-list.pdf.

[24] 12 U.S.C. § 5515.

[25] 12 U.S.C. § 5481(26).

[26] Id.

[27] 12 U.S.C. § 5515.

[28] 12 U.S.C. § 5512.

[29] 12 U.S.C. § 5562.

[30] 12 U.S.C. § 5564.

[31] Id.

[32] A digital copy is available at files.consumerfinance.gov/f/201210_cfpb_supervision-and-examination-manual-v2.pdf.

[33] See Anthony Alexis, “You Have the Right to a Fair Financial Marketplace,” CFPB, July 21, 2015, available at www.consumerfinance.gov/blog/you-have-the-right-to-a-fair-financial-marketplace/.

[34] See “CFPB Orders Servicemember Auto Loan Company to Pay $3.28 Million for Illegal Debt Collection Tactics,” CFPB, Oct. 28, 2015, available at www.consumerfinance.gov/newsroom/cfpb-orders-servicemember-auto-loan-company-to-pay-3-28-million-for-illegal-debt-collection-tactics/.

[35] Adapted from Alane A. Becket, CFBP’s Debt-Collection Proposals Spring No Surprises, XXXV ABI Journal 12, 18, 78-80, December 2016.

[36] “Consumer Financial Protection Bureau Considers Proposal to Overhaul Debt Collection Market,” CFPB, July 28, 2016, available at consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-considers-proposal-overhaul-debt-collection-market (unless otherwise indicated, all links in this article were last visited on Oct. 19, 2016).

[37] 78 Fed. Reg. 67847 (Nov. 12, 2013).

[38] “Small Business Review Panel for Debt Collector and Debt Buyer Rulemaking: Outline of Proposals under Consideration and Alternatives Considered,” CFPB, July 28, 2016, available at files.consumerfinance.gov/f/documents/Outline_of_proposals_under_consideration_and_alternatives_considered_embargoed.pdf (Appendix C).

[39] In addition, as to cases where a consumer provides a written dispute within 30 days of the validation notice, the CFPB is considering clarifying that the types of information provided above would satisfy the verification requirement under the FDCPA for the various categories of disputes.

[40] Within five days after the initial communication with a consumer in connection with the collection of any debt, a debt collector shall, unless the following information is contained in the initial communication or the consumer has paid the debt, send the consumer a written notice containing (1) the debt amount; (2) the name of the creditor to whom the debt is owed; (3) a statement that unless the consumer, within 30 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; (4) a statement that if the consumer notifies the debt collector in writing within the 30-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; and (5) a statement that, upon the consumer’s written request within the 30-day period, the debt collector will provide the consumer with the name and address of the original creditor if different from the current creditor. 15 U.S.C. § 1692g.

[41] Required fundamental information about the debt includes (1) the consumer’s full name and address; (2) the debt collector’s name and address; (3) a description of the debt type (e.g., credit card); (4) the merchant brand associated with the debt (e.g., the retailer’s name that appears on a branded card), if applicable; (5) the creditor’s name at the time of default (the “default creditor”); (6) the account number with the default creditor; (7) the amount owed on the default date; (8) the creditor to which the debt is currently owed; and (9) an itemization of interest, fees, payments and credits since the default date, as well as the amount currently owed.

[42] Required additional statements include a statement (1) describing the effect of submitting either an oral dispute or any dispute outside of the 30-day period (i.e., that before the debt collector may continue making collection communications it must confirm that it has a reasonable basis for its claims of indebtedness); (2) explaining the “collections pause” (the requirement that a debt collector in receipt of a timely written dispute or an original creditor information request cease collection activity until it verifies the debt or provides the name and address of the original creditor), as appropriate; and (3) that, for additional information, the consumer should refer to the accompanying statement of rights and visit the CFPB’s website.

[43] The tear-off form would list pre-written statements such as, “This is not my debt,” “The amount is wrong” or “I want you to send me the name and address of the original creditor,” along with a checkbox within the tear-off form that allows a consumer to indicate that he/she is submitting a payment that could be returned to the collector.

[44] 15 U.S.C. § 1692a.

[45] All available at consumerfinance.gov.

[46] Alane A. Becket and William A. McNeal, Debt-Collection Lawyers Feel Grip of Limitless Federal Power, XXXV ABI Journal 3, 36-37, 58-59, March 2016

[47] Consumer Fin. Prot. Bureau v. Frederick Hanna & Assocs. PC, No. 14-cv-02211 (N.D. Ga. July 14, 2014).

[48] See hannalawoffice.com/?page_id=9 (last visited Jan. 20, 2016).

[49] Complaint filed in n.2.

[50] Id.

[51] As one court explained:

The leading case on whether mass-produced mailings by an attorney violate the proscriptions of FDCPA is Clomon v. Jackson, 988 F.2d 1314 (2d Cir. 1993).

....

Clomon establishes that an attorney sending dunning letters must be directly and personally involved in the mailing of the letters in order to comply with the strictures of FDCPA. This may include reviewing the files of individual debtors to determine if and when a letter should be sent or approving the sending of letters based on the recommendations of others.... Given these requirements, Clomon concluded that “there will be few, if any, cases in which a mass-produced collection letter bearing the facsimile of an attorney’s signature will comply with the restrictions imposed by section 1692e.” Id. at 1321.

                Avila v. Rubin, 84 F.3d 222, 228 (7th Cir. 1996).

[52] 12 U.S.C. § 5536(a)(1)(B); see also 12 U.S.C. § 5531(a).

[53] The court’s lengthy reasoning and order: Consumer Fin. Prot. Bureau v. Frederick J. Hanna & Assocs. PC, No. 1:14-CV-2211-AT, 2015 WL 4282252 (N.D. Ga. July 14, 2015).

[54] 12 U.S.C. § 5517(e)(1).

[55] 12 U.S.C. § 5517(e)(2):

(2) Rule of construction. — Paragraph (1) shall not be construed so as to limit the exercise by the Bureau of any supervisory, enforcement, or other authority regarding the offering or provision of a consumer financial product or service … (A) that is not offered or provided as part of, or incidental to, the practice of law, occurring exclusively within the scope of the attorney-client relationship; or (B) that is otherwise offered or provided by the attorney in question with respect to any consumer who is not receiving legal advice or services from the attorney in connection with such financial product or service.

[56] 12 U.S.C. § 5517(e)(3), whose ambit, “enumerated consumer laws,” includes the FDCPA, 12 U.S.C. § 5481(12)(H).

[57] The court explained that the “Noerr-Pennington doctrine, as originally articulated, provided that because a person has a First Amendment right to petition the government for redress, he is immune from antitrust liability for his efforts to petition.... This doctrine has been extended to immunize defendants who exercise their First Amendment right to petition the government by resorting to administrative or judicial proceedings, both inside and outside the antitrust context.” Consumer Fin. Prot. Bureau v. Frederick Hanna & Assocs. PC, No. 14-cv-02211, 2015 WL 4282252, at *11 (N.D. Ga. July 14, 2014) (citations omitted).

[58] The court pointed out that the right for which Hanna argued was their clients’, not the law firm’s. However, the CFPB did not question Hanna’s standing to bring this constitutional challenge.

[59] While Hanna argued that the meaningful attorney involvement (to review any communication to a debtor) requirement is limited to letter communications and that a complaint (albeit a communication) should be treated differently, the court disagreed. Although a complaint obviously does not threaten, as a letter might, to sue because it truthfully informs of an actual suit, that misses the point. The court reasoned that a complaint is unequivocally a communication requiring meaningful attorney involvement, and that Hanna’s procedures for filing suits failed to provide it.

[60] According to the court, the same reasoning applied to violations of the CFPA, albeit by way of the CFPA’s application of a standard borrowed from the Federal Trade Commission Act.

[61] Stipulated Final Judgment and Order Signed by Hon. Amy Totenberg, U.S. District Judge, Jan. 6, 2016.

[62] This includes “Original Account-Level Documentation reflecting, at a minimum, the Consumer’s name, the last four digits of the account number associated with the Debt at the time of Charge-off, the claimed amount, excluding any post Charge-off payments, and if [the] Defendants are suing under a breach-of-contract theory, the contractual terms and conditions applicable to the Debt” and “[a] document signed by the Consumer evidencing the opening of the account forming the basis for the Debt; or Original Account-Level Documentation reflecting a purchase, payment, or other actual use of the account by the Consumer.”

[63] They are required to “identify each Individual Defendants’ telephone numbers and all email, Internet, physical, and postal addresses, including all residences; ... identify all businesses for which Defendants are the majority owner, or that Defendants directly or indirectly control, by all of their names, telephone numbers, and physical, postal, email, and Internet addresses; ... describe the activities of each such business, including the products and services offered, and the means of advertising, marketing, and sales; ... and ... describe in detail each Individual Defendants’ involvement in any business for which any of them performs services in any capacity or which he wholly or partially owns, including that Individual Defendant’s title, role, responsibilities, participation, authority, control, and ownership.”

[64] Bankruptcy practitioners might be ill-advised to presume that the CFPB will be satisfied with targeting the collections practices of this firm. On the contrary, there is every reason to assume that the CFPB’s expansive view of its powers will lead it to examine other practices such as bankruptcy.