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.      

 

Governor Cooper and Dept of Insurance Issue COVID-19 Orders Affecting Debt Collection Agencies, Others

By: Caren Enloe and Zachary Dunn

In response to the rapidly developing COVID-19 pandemic, North Carolina Governor Roy Cooper issued an order on March 27, 2020 requiring all people in the state to stay in their homes “except as permitted in” the order. In a related move, the Department of Insurance invoked statutory powers which require collection agencies and others licensed and regulated by the Department of Insurance to offer their customers the option to defer debt payments. Both orders are effective statewide and have the potential to affect business operations for the time being. The basics of each order are discussed in more detail below.

Stay at Home Order

The Stay at Home Order, available here, applies statewide and requires all persons present in North Carolina to stay in their homes except for certain specified essential purposes.  The Order additionally only allows certain specified essential businesses to remain physically open. The Order takes effect at 5:00pm Monday, March 30, 2020.

As far as financial institutions and debt collectors are concerned, there are two definitions of “Essential Businesses” which may apply and therefore allow employees to physically report to work:

Businesses that Meet Social Distancing Requirements: The Stay at Home Order exempts businesses that “conduct operations while maintaining Social Distancing Requirements” between and among its employees and customers. Social Distancing Requirements, in turn, is defined in the Stay at Home Order as

·         Maintaining at least six (6) feet distancing from other individuals;

·         Washing hands using soap and water for at least twenty (20) seconds as frequently as possible or the use of hand sanitizer;

·         Regularly cleaning high-touch surfaces; and

·         Facilitating online or remote access by customers if possible.

Financial and Insurance Institutions: The Stay at Home Order also exempts a large array of financial and insurance institutions, including “bank, currency exchanges, consumer lenders” and “affiliates of financial institutions.” While debt collectors and creditors are not specifically included on the enumerated list, this section of the order is broadly worded and arguably may include those businesses. However, whether this section applies would likely be fact specific.

Please note that the Order allows for local orders which are more restrictive and those entities with physical operations in North Carolina should verify whether or not a local order is in place which contains additional restrictions.  Please be aware that violation of the Stay at Home Order is a Class 2 misdemeanor.

Department of Insurance Order

The Department of Insurance, which regulates debt collectors, debt buyers, and insurance companies in North Carolina, also issued a state-wide order last Friday, available here. The DOI Order notes the emergency conditions in the state and invokes the provisions of N.C. Gen. Stat. § 58-2-46 (1)-(3). The order currently expires May 26, 2020.

N.C. Gen. Stat. § 58-2-46(2) requires collection agencies and debt buyers to give debtors the option of deferring debt payments[.]” The DOI Order designates the entire state as the affected geographic area, so consumers located anywhere in the state must be given the option to defer payments. Further, Chapter 58 of the General Statutes broadly defines “consumers” to include businesses, so the mandate applies equally to traditional consumer debt (that incurred for personal, family or household debt) and commercial debt.

The option to defer payments must be given for payments that are due through and including the time period covered by the DOI Order. Subsection 2 goes on to state that the deferral period “shall be 30 days from the last day the premium or debt payment may be made under the terms of the policy or contract.” While this statutory section is open to (at least) a few possible interpretations, we believe the best reading is that the option to defer must be given until at least May 26, 2020, when the DOI Order is currently set to expire. If a consumer elects to defer a payment, the deferral must be granted and the new payment date should be set 30 days after the original payment date. However, if that new payment date is still within the time period during which the DOI Order is in effect – i.e. is before May 26, 2020 – the new payment date should be extended to May 26, 2020.

Key Takeaways

The Stay at Home Order and DOI Order are focused on different very subjects, but both have the potential to affect business operations. While working from home is likely the best option if feasible, businesses may be able to stay open if they can fit within one of the exceptions in the Stay at Home Order. However, interpretation and enforcement of the order is still very much up in the air, and violation risks a Class 2 misdemeanor penalty. If you have any doubts, we recommend contacting your attorney to discuss.

The DOI Order requires debt collectors give debtors, both commercial and individuals, the option to defer debt payments until (at least) May 26, 2020. While neither the DOI Order nor N.C. Gen. Stat. § 58-2-46(2) explicitly require notification of the option to defer to consumers, notification of the option to defer is likely the safest course of action and should be built into all current scripts and correspondence.

Madden Fix Bill Passes House, Faces Uncertain Fate in Senate

By: Zachary K. Dunn

The United States House of Representatives passed H.R. 3299, commonly known as the “Madden fix” bill, by a vote of 245-171 on February 14, 2018. The bill, which is officially entitled “Protecting Consumers’ Access to Credit Act of 2017,” is a response to the Second Circuit’s decision in Madden v. Midland Funding, LLC, 786 F.3d 246 (2nd Cir. 2015), cert denied, ___ U.S. ___, 136 S.Ct. 2505 (2016).

Under the National Bank Act, 12 U.S.C. § 85, nationally chartered banks are permitted to charge interest at the rate allowed by the laws of the State where the bank is located. In Madden, the Second Circuit held that a third-party debt buyer, after purchasing the loan from a national bank, is not permitted to charge the same rate of interest on the loan that the nationally chartered bank is permitted to charge. The Court ruled that allowing third-party debt buyers to charge the same amount of interest would be an “overly broad application” of the Act. This decision, and the Supreme Court’s refusal to weigh in on the issue, lead to uncertainties in the secondary loan market.

Seeking to ameliorate this problem, H.R. 3299 would add the following language to 12 U.S.C. § 85:

A loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary.

If enacted, this measure would eliminate the uncertainties created by Madden and make clear that a third-party debt buyer may charge the same rate of interest that the nationally chartered bank may charge. The House passed H.R. 3299 mostly along partisan lines, which raises the question of whether it can reach the 60 vote threshold in the Senate. After being passed by the House, the bill was received by the Senate and referred to the Senate Banking, Housing, and Urban Affairs Committee. We will keep you updated as this important piece of legislation moves its way through Congress.

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

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.