The CFPB Publishes the Remainder of its Final Debt Collection Rule – Here’s What You Need to Know

 By Caren D. Enloe

On December 18, 2020, the CFPB published the remainder of its Final Debt Collection Rule (the “Rule”) highlighting its crown jewel -  the provisions centering around debt validation notices.  While the bulk of Part 2 addresses the parties’ obligations under Section 1692g of the FDCPA, the remainder of Part 2 ties up other loose ends, including time-barred debt, credit reporting, and communications where the consumer is deceased. The entire Rule (both Parts 1 and 2) takes effect November 30, 2021.

Aside from Debt Validation, What’s Included in Part 2 of the Rule?

            Deceased Consumers

The FDCPA defines a consumer as any natural person obligated or allegedly obligated to pay a consumer debt.  Section 1006.2(c) of the Rule interprets 1692a(3) to include deceased natural persons.  This definition dovetails with 1006.6 (Communications in Connection with Debt Collection) to allow debt collectors to communicate with the deceased consumer’s spouse, parent (if the consumer is a minor), legal guardian, executor or administrator, and confirmed successor in interest (as defined Regulation X).  Additionally, Section 1006.34 makes provision for sending debt validation notices when the consumer is deceased.

Collection of Time-Barred Debt

Perhaps the biggest surprise in Part 2 of the Rule is the CFPB’s seeming abandonment of time-barred debt and revival disclosures.  Debt collectors, however, should not assume that those disclosures will not be forthcoming at a later date.  Instead, the CFPB notes that it determines only that the specific disclosure requirements proposed “may not sufficiently accommodate the concerns raised by different stakeholders.” 

Section 1006.26 of the Rule prohibits legal actions or threats of legal actions against a consumer to collect time-barred debts.  The Rule defines “time-barred debt” to mean a debt for which the statute of limitations has expired. “Statute of limitations,” in turn, is defined as the period prescribed by applicable law for bringing a legal action against a consumer to collect a debt. Notably, Section 1006.26 differs from the proposed version of the Rule in that it implements a strict liability standard rather than the proposed “know or has reason to know”  which was originally proposed.  As finalized the Rule additionally makes clear that the filing of a proof of claim is not a legal action subject to this provision.

Credit Reporting Restrictions

The CFPB published the majority of Rule’s catch-all section, §1006.30, in Part 1 of the Rule.  The CFPB, however, held back the provisions regarding passive debt collection through credit reporting until Part 2.  While Section 1692d(3) of the FDCPA allows for credit reporting, the Section 1006.30(a) of the Rule now limits the circumstances and timing for credit reporting and prohibits the practice of passive debt collection through credit reporting.

Section 1006.30(a) prohibits debt collectors from furnishing information to a consumer reporting agency about a debt before the debt collector either speaks to the consumer about the debt in person or by telephone or sends its validation notice and then waits for a reasonable period of time to receive a notice of undeliverability. Comment 30(a)(1)-2 provides a presumption that a reasonable period of time is 14 consecutive days after the date that the communication is sent. As an exception to the Rule, 1006.30(a) additionally allows for debt collector’s immediate furnishing to a specialty consumer reporting agency that compiles and maintains a consumer’s check writing history.

Debt Validation Notices Under the Final Rule

The crown jewel of Part 2 of the Rule is Section 1006.34 which takes on section 1692g(a) of the FDCPA.  Section 1006.34 provides new delivery requirements and concepts while expanding the information required in the debt collector’s validation notice.  

    Delivery Methods

Consistent with the Rule’s stated goal to allow for technological advances, Section 1006.34 allows for the notice to be provided in writing and orally, as well as electronically.  

    Deceased Consumers           

Section 1006.34 additionally recognizes the consumer to include deceased consumers. Comment 1006.34(a)(1)-1 makes clear that if the debt collector knows or should know that the consumer is deceased, and if the debt collector has not previously provided the validation notice to the deceased consumer, the debt collector must provide the debt validation notice to a person authorized to act on behalf of the deceased consumer’s estate.

The Itemization Date

The Rule introduces a new concept that is not present in the FDCPA – the “itemization date.”  The Rule now requires the debt collector identify an “itemization date” and provide an itemization of the debt from that date forward.  Section 1006.34(b) of the Rule allows debt collectors to choose one of five specified reference dates as their “itemization date:” 

• the last statement date, which is the date of the last periodic statement or written account statement or invoice provided to the consumer by the creditor;
• the charge-off date, which is the date the creditor charged off the account;'
• the last  payment date, which is the date the last payment was applied to the debt;  
• the transaction date, which is the date of the transaction that gave rise to the debt; or 
• the judgment date, which is the date of a final court judgment that determines the amount of the debt owed by the consumer.

 The Rule’s Official Comments provide a couple of key clarifications as to the itemization date. For debt collectors choosing to use the last payment date, the Comments clarify that the last payment includes a third party payment applied to the debt.  This means that last payment date includes the date when sales proceeds were applied or when insurance reimbursements were applied to the debt. For debt collectors choosing to use the last statement date, the Comments clarify that it is the date of the last statement provided by the creditor and may include those provided by a third party acting on the creditor’s behalf, such as a servicer.  Finally, for those debt collectors relying upon a transaction date, if a debt has more than one transaction date, the debt collector may use any such date as the transaction date so long as they use it consistently. Finally, while the Rule requires the debt collector to choose an itemization date and disclose it, the Rule does not require the debt collector to disclose the itemization date category upon which it relies.

Content of the Validation Notice

Section 1006.34 expands upon the requirements of the FDCPA and requires a debt collector provide additional information about the debt in its validation notice.  Under the Rule, the validation notice requires debt collectors provide: (a) information to help consumers identify the debt; (b) information about consumer protections; and (c) information to help consumers exercise their rights.  The Rule additionally allows for and identifies certain optional disclosures.

        Information to Help Consumers Identify the Debt

While the FDCPA only requires the debt collector provide the amount of the debt and the name of the creditor to whom the debt is owed, the Rule is far more expansive.  Section 1006.34(c) of the Rule requires the validation notice include: 

• the debt collector’s name and the mailing address at which it accepts disputes and requests for original creditor information;
• the consumer's name and mailing address; 
• the identity of the “itemization date” creditor for debt related to consumer financial products or services;
• the identity of the current creditor; 
• the account number or a truncated version of the same;
• the "itemization date;"
• the amount of the debt on the itemization date;
• an itemization of the debt since the itemization date; and
• the current amount of the debt.

Residential mortgage debt subject to the mortgage servicing rules and their periodic statement requirements may be excepted from certain itemization requirements if the debt collector furnishes a copy of the most recent periodic statement provided to the consumer with the validation notice.  Section 1006.34(d) of the Rule provides the option, but does not require, a debt collector to provide its telephone contact information, a reference code the debt collector uses to identify the debt or the consumer, and the merchant brand, affinity brand or facility name for the debt.

          Information About Consumer Protections

In addition to advising the consumer of his or her rights pursuant to section 1692g(a) of the FDCPA, Section 1006.34(c) now requires the debt collector provide the end date for the validation period.  To allow for delivery of the validation notice, Section 1006.34(b)(5) of the Rule provides that a debt collector may assume that a consumer receives the validation information on any date that is at least five business days (excluding certain public holidays identified in 5 U.S.C. §6103(a), Saturdays and Sunday) after the debt collector provides the notice. Debt collectors should therefore provide at least  40 calendar days in calculating their end date of the validation period in order to account for the five business date rule.

In addition to the traditional disclosures required by the FDCPA, the Rule requires: inclusion of the Mini-Mirada disclosure, and if the debt is related to a consumer financial product or service, a statement that additional information regarding consumer protections for debt collection is available on the CFPB’s website and provide the website link.  Finally, if the validation notice is being sent electronically, a statement explaining the consumer can dispute the debt or request original creditor information electronically.

Information to Help Consumers Exercise Their Rights

To help consumers exercise their rights under 1692g(a), Section 1006.34(c) requires debt collectors provide the consumer with a response section that includes dispute prompts under the headings “How do you want to respond?” and “Check all that apply.” The dispute response must include the following prescribed dispute statements and list them in the following order:

• "I want to dispute the debt because I think:”;
•  “This is not my debt.”; 
•  “The amount is wrong.”; and 
•  “Other (please describe on reverse or attach additional information.)”

The Rule additionally requires the following additional prompt: “I want you to send me the name and address of the original creditor.” 

This tear off section must additionally include the debtor’s name and address, as well as the debt collector’s name and the address at which it receives debt validation requests.  The Rule also allows as optional certain payment disclosures but makes clear that any payment disclosures must appear below the mandated prompts.

State Law and Other Applicable Law Disclosures

Section 1006.34(d) recognizes and allows for state mandated disclosures among the “optional” disclosures. The Rule allows for these to be placed on the reverse side of the validation notice.  For such disclosures, however, the debt collector must place a statement on the front of the validation notice referring to those disclosures.  Importantly, the Rule specifies that such disclosures on the reverse side of the notice must appear above the tear off section. 

The Rule also recognizes that certain jurisdiction require or provide a safe-harbor as long as a disclosure is provided.  For those disclosures, the Rule requires that they be disclosed on the front of the validation notice.

Other Optional Disclosures

Section 1006.34(d) allows for certain other optional disclosures.  In addition to those already noted, The Rule allows for disclosures regarding a consumer’s ability to request a Spanish-language translation of a validation notice.  Likewise, a debt collector may send its validation notice completely and accurately translated in another language so long as certain additional conditions are met. 

In addition, the Rule allows a debt collector to disclose its website and email address.  Finally, if the validation notice is not provided electronically, the Rule allows a debt collector to provide a statement explaining how a consumer can dispute the debt or request original-creditor information electronically.

Safe Harbor Provisions.

The Rule includes a model form and a safe harbor for those that use the model form. Deviations are allowed, provided that the content, format, and placement of information are substantially similar to the model form. Debt collectors should not that deviations may at least in part negate the safe harbor protections.

What’s Next?

Collection agencies should begin preparing for the November 30, 2021 effective date.  Among other things:

• All compliance teams should begin a thorough review of the Rule and Comments to assess what changes will need to be made to the agency’s practice and procedures;
• All policies and procedures should be similarly updated and training programs should be undertaken with staff to ensure their understanding of the Rule;
• All scripts should be reviewed and adjusted to comply with the Rule;
• All letters should be reviewed and adjusted to comply with the Rule and the agencies should begin coordinating with their letter vendors to ensure a smooth transition on November 30, 2021;
• Agencies should begin reviewing and assessing their ability and desire to use electronic communications, keeping in mind other statutory requirements that may also be in play, including the Telephone Consumer Protection Act, as well as their clients’ use of electronic communication consents;
• Agencies should begin discussing and coordinating with their first party clients the itemization date and what additional information will need to be provided to the agency at placement to ensure compliance with Section 1006.34’s new validation requirements;
• Agencies should begin reviewing and assessing applicable state disclosure requirements to ascertain their impact on the agency’s ability to use the Safe Harbor Validation Notice and what adjustments, if any, will need to be made to address the same; and
• Agencies should begin assessing and adjusting their credit reporting practices to ensure compliance with new requirements.

Caren Enloe is a partner with Smith Debnam in Raleigh, NC and leads the firm’s Consumer Financial Services Litigation and Compliance Group.  Caren additionally serves as the Chair of the American Bar Association’s Debt Collection and Bankruptcy Subcommittee.  Active in a number of trade groups, Caren serves as the Member Attorney Program State Chair for ACA International and as a member of the National Creditors Bar Association’s Defense Bar.      

 

Mere Retention of Property of the Estate Does Not Violate the Automatic Stay

 

By: Landon G. Van Winkle

 

The Supreme Court of the United States has resolved a split in the circuits as to whether an entity that is passively retaining possession of property in which a bankruptcy estate has an interest has an affirmative obligation under the Bankruptcy Code’s automatic stay, 11 U.S.C § 362, to return that property to the debtor or trustee immediately upon the filing of the bankruptcy petition. The case, City of Chicago v. Fulton, No. 19-357,  resolves this split in favor of the creditor.

 

Background

 

The case arose from four separate chapter 13 bankruptcy cases in which the debtors sought to regain possession of their vehicles from the City of Chicago, which had seized and impounded the vehicles prepetition due to unpaid parking tickets and similar traffic fines. The bankruptcy court in each instance found that by refusing to return possession of the vehicles to the chapter 13 debtors after they had filed their respective bankruptcy cases, the City had “exercised control” over property of the estate in violation of 11 U.S.C. § 362(a)(3). The bankruptcy court ordered the City to return the vehicles and imposed sanctions for the City’s violation of the automatic stay. The cases were consolidated and certified for direct appeal to the U.S. Court of Appeals for the Seventh Circuit, which affirmed the bankruptcy court relying on its prior holding in Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009), that a creditor must return a debtor’s vehicle upon the debtor’s filing a petition for bankruptcy in order to comply with the automatic stay.

 

Resolution of the case involved interpretation and construction of three related statutory provisions in the Bankruptcy Code, specifically 11 U.S.C. §§ 541, 362, and 542, which govern property of the estate, the automatic stay, and turnover, respectively. Under the Bankruptcy Code, property of the estate includes all property, wherever located and by whomever held, in which the debtor holds any legal or equitable interest as of the petition date. The Bankruptcy Code’s automatic stay generally protects property of the estate from the collection efforts of prepetition creditors, and prohibits, among other things, “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” 11 U.S.C. § 362(a)(3).  Section 542(a) of the Bankruptcy Code requires that an entity in possession, custody, or control of certain property of the estate must account for and turnover such property to the trustee, or debtor, unless such property is of inconsequential value to the estate. 11 U.S.C. § 542(a).

 

The Court’s Decision

 

In an 8-0 opinion (Justice Barrett took no part in the consideration or decision of the case), the Court vacated the judgment of the Court of Appeals and remanded the case for further proceedings. In its opinion, the Court largely adopted the minority position espoused by the Third, Tenth, and D.C. Circuits and held that “mere retention of property does not violate §362(a)(3).” Slip Op. at 1. To reach this outcome, the Court first construed the operative words in § 362(a)(3), and then considered the interaction between § 362(a)(3) and the turnover provision, § 542(a). First, the Court held that the most natural reading of the terms “stay,” “any act,” and “exercise control,” appearing in § 362(a)(3) was that this subsection prohibited “affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.” Id. at 3. Next, the Court found that its interpretation of § 362(a)(3) was bolstered by the separate turnover provisions contained in § 542(a) of the Bankruptcy Code. Construing § 362(a)(3) to create an affirmative turnover obligation on creditors, the construction urged by the debtors, “would create at least two serious problems.” Id. at 5. First, construing § 362(a)(3) as a “blanket turnover provision” would render the turnover provision in § 542(a) mere surplusage, since a creditor would be forced to turnover estate property immediately to avoid “exercising control” over it, notwithstanding the provisions of § 542. Id. Second, and relatedly, construing § 362(a)(3) to mandate turnover in every case would create a contradiction between that section and § 542(a), which excuses a person from turning over property if, among other exceptions, it is of inconsequential value to the estate. Id. As the Court noted, “it would be ‘an odd construction’ of §362(a)(3) to require a creditor to do immediately what §542 specifically excuses.” Id. (quoting Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 20 (1995)). Finally, the Court agreed with the City of Chicago that the insertion of the phrase “or to exercise control over property of the estate” into § 362(a)(3) by BAFJA in 1984 “simply extended the stay to acts that would change the status quo with respect to intangible property and acts that would change the status quo with respect to tangible property without ‘obtain[ing]’ such property.” Id. at 7 (quoting 11 U.S.C. § 362(a)(3)).

 

Having concluded that mere retention of estate property following the petition date did not violate § 362(a)(3), the Court vacated the judgment of the Court of Appeals and remanded the case. It expressly declined to decide “how the turnover obligation in §542 operates.” Id. It also did not analyze subsections (a)(4) and (a)(6) of § 362, which the bankruptcy court in one of the four original bankruptcy cases had held that the City had also violated, since the Court of Appeals had also not reached that issue. Id. at 7 & n.2.

 

Conclusion

 

            The Court’s opinion resolves a circuit split and added much-needed clarity to an issue that has sharply divided lower courts for decades. Creditors may now rest assured that as long as their passive retention of collateral seized prepetition is consistent with maintaining the status quo as of the petition date, they will not run afoul of the automatic stay.  However, Fulton leaves open the question of whether the same creditor has any affirmative turnover duties under § 542(a), or whether it is entitled to await service of a summons and complaint in an adversary proceeding seeking turnover.

Landon Van Winkle is an associate at Smith Debnam and member of the firm's Consumer Financial Services Litigation and Bankruptcy sections.

 

Post-Discharge Credit Inquiries by Mortgage Servicer did not Violate FCRA

 By: Landon G. Van Winkle

 

A divided panel of the U.S. Court of Appeals for the Ninth Circuit recently held that a mortgage servicer had a permissible purpose for pulling the consumer reports of three borrowers for whom it serviced two mortgages even though the borrowers’ personal liability on the mortgages had been discharged in bankruptcy. Marino v. Ocwen Servicing, LLC, 978 F.3d 669 (9th Cir. 2020).  Specifically, the servicer was authorized to access the borrowers’ consumer reports in order to evaluate them for loss mitigation options, such as a loan modification, short sale, or deed-in-lieu of foreclosure. Id. at 675.

The borrowers each owned a home subject to a mortgage serviced by Ocwen Loan Servicing, LLC (“Ocwen”). The borrowers subsequently filed bankruptcy, and each received a discharge, which discharged their personal liability under their respective mortgages. Following the discharges, Ocwen obtained the borrower’s credit reports. The borrowers, eight in total, sued Ocwen in a putative class action, alleging that it willfully violated the FCRA by obtaining their consumer reports without a permissible purpose, in alleged violation of 15 U.S.C. § 1681b(f)(1).

The U.S. District Court for the District of Nevada granted Ocwen’s motion for summary judgment. In doing so, it relied on a prior unpublished decision from the Ninth Circuit, Vanamann v. Nationstar Mortgage, LLC, 775 F. App’x 260 (9th Cir. 2018). In Vanamann, the Ninth Circuit dealt with identical facts—a borrower whose personal liability on a mortgage that was discharged in a bankruptcy and a mortgage servicer who subsequently accessed the borrower’s credit report. Marino, 978 F.3d at 672 (citing Vanamann, 775 F. App’x at 262). There, the plaintiff alleged only a willful violation of the FCRA, requiring her to demonstrate that Nationstar “engaged in conduct ‘known to violate the [FCRA]’ or acted in ‘reckless disregard of [a] statutory duty.’” Vanamann, 775 F. App’x at 262 (quoting Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 56–57 (2007)). To prove reckless disregard, the plaintiff had to prove that Nationstar’s interpretation of the FCRA was objectively unreasonable. Id. Nationstar argued that it had a permissible purpose under § 1681b(a)(3)(A), which permits a consumer reporting agency to furnish a consumer report to a person which the agency has reason to believe “intends to use the information in connection with a credit transaction involving the consumer . . . or review or collection of an account of, the consumer . . . .” 15 U.S.C. § 1681b(a)(3)(A). The Ninth Circuit assumed that Nationstar lacked a permissible purpose under § 1681b, but nevertheless affirmed the dismissal of the plaintiff’s FCRA claim, because the plaintiff could not demonstrate that Nationstar’s conduct was known to violate the FCRA, or that its interpretation of § 1681b(a)(3)(A) was objectively unreasonable. Id. Crucially, the panel noted that the FCRA contained no provision “addressing bankruptcy discharges for Nationstar to interpret, much less interpret recklessly.” Vanamann, 775 F. App’x at 262. Based on the nearly identical facts at issue in Vanamann, the district court concluded that Ocwen could not have willfully violated the FCRA, and therefore granted its motion for summary judgment.

On appeal, the Ninth Circuit affirmed the district court and cited Vanamann approvingly. However, it followed a somewhat circuitous route in analyzing the case. Rather than follow the straightforward process in Vanamann, in which the panel assumed that Nationstar had violated the FCRA, but found that any such violation could not have been willful, the Marino majority instead made a point to address the “threshold question of whether the defendant violated the FCRA.” Marino, 978 F.3d at 671. Addressing this “threshold question” was important, according to the majority, in order to “prevent the law in this area from stagnating.” Id. The majority’s basis for this approach was its view that since a defendant in an FCRA case could “nearly always avoid liability so long as an appellate court ha[d] not already interpreted” the FCRA provision at issue, if the appellate courts simply continued to dispose of cases on the basis that there was no negligent or willful violation of the FCRA, then “the question of statutory interpretation will likely never be answered.” Id. at 673–74.

Therefore, the majority first examined whether Ocwen’s conduct violated § 1681b(f)(1). Ocwen argued that § 1681b(a)(3)(A) provided it with a permissible purpose, because it was using the borrowers’ credit reports to evaluate them for loss mitigation options. Id. at 675. The borrowers argued that because they had vacated and “surrendered” their homes prior to Ocwen’s credit inquiries, and because they had never expressed any interest in avoiding foreclosure, Ocwen lacked a permissible purpose. Id. at 675–76. In rejecting these arguments, the majority observed that nothing in § 1681b(a)(3)(A) required a consumer to affirmatively request a foreclosure alternative before a servicer could review the consumer’s account to determine his or her eligibility. Further, the discharge injunction in the U.S. Bankruptcy Code specifically excepts from its ambit “a secured creditor’s efforts to seek ‘periodic payments associated with a valid security interest in lieu of pursuit of in rem relief to enforce the lien.’” Id. at 675 (quoting 11 U.S.C. § 524(j)(3)). Similarly, it was largely irrelevant whether the borrowers had vacated their homes prior to the credit inquiries at issue, since Ocwen “could have reasonably thought that even a debtor that moved out of his or her home might be interested in returning if Ocwen made a sufficiently attractive offer.” Id. at 676. The majority thus held that Ocwen articulated a permissible purpose to access the borrowers’ consumer reports under § 1681b(a)(3)(A). In dicta, however, the majority sought to cabin this holding somewhat when it opined that “[w]e imagine that if a consumer clearly informs the servicer or lender that he or she has no interest in avoiding foreclosure, then the servicer or lender might lack a permissible purpose for continuing to review the consumer’s credit.” Id. Then, in a single paragraph, the majority noted its “agreement with the district court that Ocwen did not willfully violate the FCRA.” Id. at 676.

Judge Bea concurred in the result and the reasoning of the majority regarding its conclusion that Ocwen did not willfully violate the FCRA. Id. at 676 (Bea, J., concurring). However, Judge Bea chided the majority for including “discussion of two matters not essential to the determination of this case.” Id. First, Judge Bea took issue with the majority’s analysis of whether Ocwen’s conduct violated the FCRA, an analysis which he noted was “not relevant to the decision of the case before us.” Id. Second, he took issue with the majority “imagin[ing] a hypothetical, which Plaintiffs did not plead nor prove, that the majority states may constitute a statutory violation of the FCRA.” Id. at 677. Judge Bea’s concern with the majority’s inclusion of a hypothetical FCRA violation appears particularly valid in the Ninth Circuit, where “dicta in panel opinions may become the binding law of the circuit.” Id. at 679 (citing United States v. Johnson, 256 F.3d 895, 947 (9th Cir. 2001)).

Mortgage servicers, at least in the Ninth Circuit, should take some comfort in the Court’s finding that such servicers retain a permissible purpose for accessing a borrower’s consumer report even after the borrower’s personal liability on the mortgage has been discharged, so long as the servicer intends to use the report to evaluate the borrower for loss mitigation options. However, mortgage servicers should remain wary of the limitations on this permissible purpose forecast by the Marino panel, and should consider adopting a policy to limit or modify future credit inquiries for loss mitigation accounts where the borrower unequivocally informs the servicer that he or she is not interested in pursuing loss mitigation options.

Landon Van Winkle is an associate at Smith Debnam and member of the firm's Consumer Financial Services Litigation and Bankruptcy sections.