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.      

 

Debt Collection Letter's Inclusion of Court Costs Was Not Deceptive

Any opinion that starts out by stating “[t]his case is about $82.00” is not likely to go well for one party and in this instance, that was the case for Nestor Saroza.  A New Jersey district court recently held that a debt collection letter was not false or deceptive when it included court costs in its demand for the balance.  In Saroza v. Lyons, Doughty & Veldhuis, 2017 U.S. Dist. LEXIS 208913 (D.N.J. Dec. 19, 2017), the collection law firm filed a collection suit seeking recovery of the balance due ($9,971.55), plus court costs.  Its subsequent collection letter demanded a balance of $10,053.55.  The difference, $82.00, was comprised of court costs.  The consumer filed suit asserting that the demand letter violated the FDCPA because the $82.00 was not part of the debt.  The demand letter in question read as follows:

LYONS, DOUGHTY & VELDHUIS, P.C. . . .

Re: Capitol One Bank (USA), N.A. v. NESTOR SAROZA

Docket No. DC-00065-16

Amount Due: $10,053.55

Dear NESTOR SAROZA:

We have filed suit to recover the balance due in the above matter. However, our goal is to resolve the debt in a way that is manageable for you. We encourage you to contact us. If you would rather not call us, you can ask questions and/or make a settlement offer or payment arrangement proposal via our website: www.ldvlaw.com . . . .

THIS FIRM IS A DEBT COLLECTOR

In support of dismissal, the law firm presented the credit card agreement which provided for the recovery of the creditor’s collection expenses, attorneys’ fees and court costs and pointed to the collection suit to support its argument that the letter was accurate.  The consumer meanwhile argued that the letter did not explain the filing fees were included and thus, was false, deceptive or misleading.  According to the court, “[i]n essence, the line Saroza wants this Court to draw seems to be that collection notices which say ‘with costs’ are permissible under the FDCPA but those that add the costs into the requested sum are not.”  Saroza at *7-8.  The court declined to do so.  Instead, the court determined that this was a distinction without a difference - particularly where the costs are accurate and the consumer was on notice from the Customer Agreement that this could happen.

The court also rejected the consumer’s argument that the omission of the court costs from the summons issued by the state court, coupled with the letter, was misleading.  In doing so, the court noted that the summons was issued by the court not the defendant and placed the burden on Saroza to read the complaint served with the summons.

In dismissing the law suit, the Court made clear that certain basic responsibilities fall upon a consumer – to read the documents provided to him by the creditor and debt collector.  The Court further emphasized a theme that we are seeing more and more: that the FDCPA will not allow liability for bizarre or idiosyncratic interpretations of collection notices and preserves a quotient of reasonableness and presumes a basic level of understanding and willingness to read with care.  See Wilson v. Quadramed Corp., 225 F.3d 350, 354-55 (3^rd Cir. 2000)

District Court Takes Expansive View of "Deceptive or Misleading" Practices under FDCPA

By Zachary Dunn

The FDCPA prohibits a debt collector from using “any false, deceptive, or misleading representation” in connection with the collection of a debt. See 15 U.S.C. § 1692e.  Recently, the Eastern District of New York took an expansive view of section 1692e, thereby making truthful statements a violation of the statute’s mandates.

In Islam v. Am. Recovery Serv., 2017 U.S. Dist. LEXIS 180415 (S.D.N.Y. Oct. 30, 2017), the plaintiff, Fatema Islam, failed to pay the balance due on her credit card with Bank of America, N.A., and Bank of America responded by placing Islam’s account with American Recovery Service (“ARS”) for collection.  Id. at *2.  ARS sent a letter to Islam on August 11, 2016 stating, in relevant part, that “[a]s of the date above, you owe $14,413.78.”  The letter also included a table of information which provided other details – such as identifying Bank of America as the original creditor,” noting that the “total amount of the debt due as of charge-off" as $14,413.78; declaring that the “total amount of interest accrued since charge off” was $0, and further notifying Islam that the “total amount of non-interest charges or fees accrued since charge-off” was $0.  After the table, the letter again advised Islam that “[t]he balance owed above reflects the total balance due as of the date of this letter. The itemization reflects the post charge-off activity we received from Bank of America.” Id. (emphasis added).   

Bank of America maintained a policy that any charged off account would not accrue any new interest or fees after the date of charge off.  Consistent with that policy, the balance on Islam’s account had not grown since it was charged off on August 4, 2016.  Based solely on the language of the August 11, 2016 letter, Islam filed suit alleging that the letter was false or misleading in violation of 15 U.S.C. § 1692e.

The court agreed, and based its analysis on the Second Circuit’s 2016 decision in Avila v. Riexinger & Associates, 817 F.3d 72 (2d Cir. 2016).  In Avila, the Second Circuit encountered a case in which a collection letter disclosed the “current balance” of the debt, but did not disclose that after the date of the collection letter, the account was continuing to accrue interest and late fees.  Id. at 75-76.  The Second Circuit held that because the collection notice “did not disclose that the balance might increase due to interest and fees,” it was a “deceptive [or] misleading representation” of the amount due under the general prohibition of 15 U.S.C. § 1692e.  Id.

While the Islam court found Avila to be “factually distinguishable,” it held that Avila’s analytical framework dictated the outcome.  The court explained that the language of ARS’ letter – that Islam’s debt was $14,413.78 “as of the date of” the letter – suggested that Islam’s debt was in “a dynamic state.”  Islam, at *10.  “‘[A]s of the date’ suggests that on a different date, the amount of the debt may be different – and, of course, anyone would understand that it won't get any smaller without payment. But the undisputed fact is that, contrary to this suggestion, the amount of this debt will never be different, never get greater.”  Id.  Islam, as the embodiment of the “least sophisticated consumer,” was therefore “subtly incentivized to pay now to avoid paying more later, when, in fact, there never would be ‘more later.’”  Id.  This caused ARS to possibly receive money that it might not have received but for the language “as of the date of this letter,” which makes that language misleading or deceiving.  The court went on to hold that the misleading or deceiving communication was material, because if the least sophisticated consumer had known that the debt would never get any bigger, she might have chosen to pay another debt.  Id.  

This case serves as a troubling example of truthful statements being interpreted as misleading or deceiving.  See id. at *9 (“The courts are to some extent simply burdening the collection industry with a continuing portfolio of litigation that potentially raises the cost of credit for all consumers.”).  Though all statements in ARS’ letter were factually correct – including the statement that Islam’s debt was $14,413.78 as of the date of the letter – the letter was nevertheless deemed to be “misleading or deceiving” because the least sophisticated consumer may incentivized into paying a valid debt they might not have otherwise paid.  To comply with the reasoning of Islam, creditors and debt collectors may wish to craft demand letters without the phrase “as of the date of this letter” if the debt will not increase, or to maintain a policy under which charged off debt continues to accrue interest and fees.

Zachary Dunn is an attorney practicing in Smith Debnam's Consumer Financial Services Litigation and Compliance Group.