Consumer Loan

A Closer Look at the CFPB’s Proposed Debt Collection Rules – Part Four: Other Conduct Provisions

September 6, 2019 By Anoush Garakani

A&B Abstract

This blog post is part four of a five-part series examining the Consumer Financial Protection Bureau’s (the “CFPB” or “Bureau”) proposed rule amending Regulation F (“Proposed Rule”), which implements the Fair Debt Collection Practices Act (“FDCPA”) to prescribe rules governing the activities of debt collectors.

In part one of this series, we provided a brief overview of the FDCPA and the Proposed Rule’s most impactful provisions. In part two, we summarized the key provisions of the Proposed Rule relating to debt collector communications with consumers. In part three, we summarized the key provisions of the Proposed Rule relating to debt collectors’ disclosures to consumers. This post summarizes certain additional conduct provisions under the Proposed Rule. These include provisions relating to decedent debt, the collection of time-barred debt, credit reporting restrictions, and restrictions on a debt collector’s ability to transfer, sell, or place a debt for collection.

Proposed Provisions Related to Decedent Debt

The FDCPA defines a “consumer” as any natural person obligated or allegedly obligated to pay any debt. Under the Proposed Rule, this definition would be revised to make clear that a “consumer” includes any natural person, whether living or deceased, obligated or allegedly obligated to pay any debt. In addition, for purposes of the Proposed Rule’s provisions regarding communications in connection with debt collection (proposed section 1006.6) and the prohibition on communicating through a medium of communication that the consumer has requested the debt collector not use (proposed section 1006.14(h)), proposed section 1006.6(a)(5) would interpret FDCPA section 805(d)’s definition of the term consumer to include:

The consumer’s spouse;
The consumer’s parent, if the consumer is a minor;
The consumer’s legal guardian;
The executor or administrator of the consumer’s estate, if the consumer is deceased; and
A confirmed successor in interest, as defined in Regulation X, 12 CFR 1024.31, and Regulation Z, 12 CFR 1026.2(a)(27)(ii).

Under Regulations X and Z, a successor in interest is a person to whom a borrower transfers an ownership interest either in a property securing a mortgage loan subject to subpart C of Regulation X, or in a dwelling securing a closed-end consumer credit transaction under Regulation Z, provided that the transfer is:

A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
A transfer to a relative resulting from the death of a borrower;
A transfer where the spouse or children of the borrower become an owner of the property;
A transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property; or
A transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.

A confirmed successor in interest, in turn, means a successor in interest whose identity, and ownership interest in the relevant property type, have been confirmed by the servicer of the loan.

The Bureau has previously explained that the word “includes” in FDCPA section 805(d) indicates that section 805(d) is an exemplary, rather than an exhaustive, list of the categories of individuals who are consumers for purposes of that section. The Bureau has further explained that, “given their relationship to the individual who owes or allegedly owes the debt, confirmed successors in interest are—like the narrow categories of persons enumerated in FDCPA section 805(d)—the type of individuals with whom a debt collector needs to communicate about the debt.” The Bureau is seeking comment on the proposed definition of “consumer” under section 1006.6(a)(5), including on the benefits and risks of communications about debts between debt collectors and confirmed successors in interest.

In addition, proposed comment 6(a)(4) would clarify that the terms “executor or administrator” also include the personal representative of the consumer’s estate. The proposed commentary would explain that a personal representative is any person who is authorized to act on behalf of the deceased consumer’s estate. Persons with such authority may include personal representatives under the informal probate and summary administration procedures of many states, persons appointed as universal successors, persons who sign declarations or affidavits to effectuate the transfer of estate assets, and persons who dispose of the deceased consumer’s assets extrajudicially.

The proposed comment would adapt the general description of the term personal representative from Regulation Z, 12 CFR 1026.11(c), comment 11(c)-1 (persons “authorized to act on behalf of the estate”) rather than the general description found in the Federal Trade Commission’s (“FTC”) Policy Statement on Decedent Debt (persons with the “authority to pay the decedent’s debts from the assets of the decedent’s estate.”). The Bureau has indicated that it believes this change is non-substantive. The Bureau is requesting comment on the scope of the definition of personal representative in proposed comment 6(a)(4)-1 and on any ambiguity in the illustrative descriptions of personal representatives. Interested stakeholders should consider the potential operational challenges associated with validating and documenting whether a person is in fact the personal representative of a deceased consumer’s estate, given that disclosure regarding a consumer’s debt to the wrong person could result in a prohibited third-party disclosure. Thus, debt collectors and other industry stakeholders should determine whether additional guidance from the Bureau is needed.

In addition, we note proposed section 1006.18’s general prohibition against false, deceptive, or misleading representations, which the Bureau has indicated would apply to express or implied misrepresentations that a personal representative is liable for the deceased consumer’s debts. The Bureau is requesting comment on whether the general prohibition against false, deceptive, or misleading representations in proposed section 1006.18 is sufficient to protect individuals who communicate with debt collectors about a deceased consumer’s debts, or whether affirmative disclosures in the decedent debt context are needed.

Proposed Provisions Regulating the Collection of Time-Barred Debts

Under current law, multiple courts have held that suits and threats of suit on time-barred debt violate the FDCPA, reasoning that such practices violate FDCPA section 807’s prohibition on false or misleading representations, FDCPA section 808’s prohibition on unfair practices, or both. The FTC has similarly concluded that the FDCPA bars actual and threatened suits on time-barred debt.

Nevertheless, the Bureau has indicated that its enforcement experience suggests that some debt collectors may continue to sue or threaten to sue on time-barred debts. Furthermore, in response to its Advanced Notice of Proposed Rulemaking, issued in November 2013, the Bureau indicated that some consumer advocacy groups and State Attorneys General observed that consumers are often uncertain about their rights concerning time-barred debt and that those observations have been borne out by the Bureau’s own consumer testing.

Consequently, the Proposed Rule would interpret FDCPA section 807 to provide that a debt collector must not bring or threaten to bring a legal action against a consumer to collect a debt that the debt collector “knows or should know” is a time-barred debt because such suits and threats of suit explicitly or implicitly misrepresent, and may cause consumers to believe, that the debts are legally enforceable. The Bureau has indicated that the Proposed Rule “may provide debt collectors with greater certainty as to what the law prohibits while also protecting consumers and enabling them to prove legal violations without having to litigate in each case whether lawsuits and threats of lawsuits on time-barred debt violate the FDCPA.” However, it is unclear how the “knows or should know” standard will be applied. The Bureau appears to have acknowledged as much, indicating that “sometimes [it] may be difficult…to determine whether a ‘know or should have known’ standard has been met” and that “[s]uch uncertainty could increase litigation costs and make enforcement of proposed section 1006.26(b) more difficult.” Therefore, the Bureau has specifically requested comment on using a “knows or should know” standard in proposed section 1006.26(b) as well as on the advantages of using a strict liability standard in its place.

While it is notable that the Bureau did not take the additional step of prohibiting the collection of time-barred debt in a non-judicial setting, it has indicated that it is “likely to propose that debt collectors must provide disclosures to consumers when collecting time-barred debts.” The Bureau has indicated that it is currently completing its evaluation of “whether consumers take away from non-litigation collection efforts that they can or may be sued on a debt and, if so, whether that take-away changes depending on the age of the debt.” The Bureau is also evaluating how a time-barred debt disclosure might affect consumers’ understanding of whether debts can be revived. Specifically, the Bureau is considering disclosures that would inform a consumer that, because of the age of the debt, the debt collector cannot sue to recover it, and would also include, where applicable, a disclosure that would inform a consumer that the right to sue on a time-barred debt can be revived in certain circumstances.

The Bureau has indicated that it plans to conduct additional consumer testing of possible time-barred debt and revival disclosures to further inform its evaluation of any time-barred debt disclosures. The Bureau intends to issue a report on such testing and any disclosure proposals related to the collection of time-barred debt and will provide stakeholders with an opportunity to comment on such testing if the Bureau does in fact intend to use it to support disclosure requirements in a final rule.

Proposed Restrictions on Credit Reporting

The Bureau noted that some debt collectors engage in so-called “passive” collections by furnishing information to consumer reporting agencies without first communicating with consumers. Accordingly, in order to mitigate the perceived harm that a consumer may suffer if a debt collector furnishes information to a consumer reporting agency without first communicating with the consumer, proposed section 1006.30(a) would prohibit a debt collector from furnishing information regarding a debt to a consumer reporting agency before communicating with the consumer about the debt.

In addition, the Bureau noted that during the Small Business Regulatory Enforcement Fairness Act (“SBREFA”) process, industry stakeholders expressed concern over the potential burden associated with documenting, such as by using certified mail, that a consumer received a communication and recommended that the Bureau consider clarifying the type of communication that would be sufficient to satisfy the requirement, including clarifying that debt collectors do not need to send the validation notice by certified mail.

To address the recommendation that came out of the SBREFA process, the Bureau is proposing comment 30(a)-1. In particular, proposed comment 30(a)-1 would clarify that a debt collector would satisfy proposed section 1006.30(a)’s requirement to communicate if the debt collector conveyed information regarding a debt directly or indirectly to the consumer through any medium, but a debt collector would not satisfy the communication requirement if the debt collector attempted to communicate with the consumer but no communication occurred. By way of example, a debt collector would be considered to have communicated with the consumer if the debt collector provides a validation notice to the consumer, but a debt collector would not be considered to have communicated with the consumer by leaving a limited-content message for the consumer.

The Bureau is seeking comment on proposed section 1006.30(a) and its related commentary. In light of the record retention requirements that would be imposed under the Proposed Rule—which would require a debt collector to retain evidence of compliance with the Proposed Rule for three years—debt collectors and other industry stakeholders should consider whether additional guidance is needed regarding the level of documentation or other evidence of compliance needed to satisfy proposed section 1006.30(a) and the record retention requirements under proposed section 1006.100.

Proposed Provisions Governing Transfers of Debt

In promulgating the Proposed Rule, the Bureau noted that the “sale, transfer, and placement for collection of debts that have been paid or settled or discharged in bankruptcy, or that are subject to an identity report creates risk of consumer harm.” Specifically, if a debt is paid or settled, or discharged in bankruptcy, the debt is either extinguished or uncollectible, and if a debt is listed on an identity theft report, the debt likely resulted from fraud, in which case the consumer may not have a legal obligation to repay it.

The Bureau has noted that when the FDCPA became law, debt sales and related transfers were uncommon. However, in more recent years, debt sales and transfers have become more frequent. As a result, the Bureau has noted that the “general growth in debt sales and transfers may have increased the likelihood that a debt that has been paid, settled, or discharged in bankruptcy may be transferred or sold.” Additionally, identity theft may increase the number of debts that are created if consumers’ identities are stolen and their personal information is misused.

To address these perceived risks, proposed section 1006.30(b)(1)(i) generally would prohibit a debt collector from selling, transferring, or placing for collection a debt if the debt collector “knows or should know” that the debt has been paid or settled, discharged in bankruptcy, or that an identity theft report has been filed with respect to the debt.

Moreover, with respect to a debt collector that is collecting a consumer financial product or service debt, proposed section 1006.30(b)(ii) would identify as an unfair act or practice under Dodd-Frank the sale, transfer, or placement for collection of such debt.

The Proposed Rule would provide an exemption from this general prohibition for transfers made to the debt’s owner. The Bureau is also proposing the following three additional exemptions that parallel the exemptions found in the Fair Credit Reporting Act, including:

Transferring the debt to a previous owner of the debt if transfer is authorized under the terms of the original contract between the debt collector and the previous owner;
Securitizing the debt or pledging a portfolio of such debt as collateral in connection with a borrowing; or
Transferring the debt as a result of a merger, acquisition, purchase and assumption transaction, or transfer of substantially all of the debt collector’s assets.

The Bureau is seeking comment on several issues related to this proposal, including:

On whether additional categories of debt, such as debt currently subject to litigation and debt lacking clear evidence of ownership, should be included in any prohibition adopted in a final rule;
On how frequently consumers identify a specific debt when filing an identity theft report, and on how frequently debt collectors learn that an identity theft report was filed in error and proceed to sell or transfer the debt;
On any potential disruptions that proposed section 1006.30(b)(1)(i) would cause for secured debts, such as by preventing servicing transfers or foreclosure activity related to mortgage loans; and
On whether any of the currently proposed categories of debts should be clarified and, if so, how; and on whether additional clarification is needed regarding the proposed “know or should know” standard.

Takeaway

While the Bureau appears to be cognizant of the potential compliance issues associated with several of the aforementioned provisions of the Proposed Rule, it is unclear how the “knows or should know” standard will be interpreted and enforced or whether the standard will result in more litigation than otherwise anticipated. Accordingly, debt collectors and other industry stakeholders should consider commenting on these and other provisions of the Proposed Rule.

A Closer Look at the CFPB’s Proposed Debt Collection Rules – Part Three: Important Details Relating to Disclosures and Debt Validation Notices

August 30, 2019 By Morey Barnes Yost, Anoush Garakani

A&B Abstract

This blog post is part three of a five-part series examining the Consumer Financial Protection Bureau’s (the “CFPB” or “Bureau”) proposed rule amending Regulation F (“Proposed Rule”), which implements the Fair Debt Collection Practices Act (“FDCPA”) to prescribe rules governing the activities of debt collectors.

In part one of this series, we provided a brief overview of the FDCPA and the Proposed Rule’s most impactful provisions. In part two, we summarized the key provisions of the Proposed Rule relating to debt collector communications with consumers. This post summarizes the key provisions of the Proposed Rule relating to debt collectors’ disclosures to consumers. These include provisions relating to key proposed disclosures, namely the requirements relating to debt validation notices, and the electronic provision of required disclosures.

Background

Section 809(a) of the FDCPA requires that within five days after the initial communication with the consumer in connection with the collection of any debt, a debt collector must provide the consumer with a validation notice (unless the required information is contained in the initial communication, or the consumer has paid the debt). The statute requires the notice to include:

The amount of the debt;
The name of the creditor to whom the debt is owed;
A statement that unless the consumer disputes the validity of the debt (or any portion thereof) within 30 days after receipt of the notice, the debt collector will assume the debt to be valid;
A statement that if the consumer notifies the debt collector in writing during 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 the debt collector will mail the consumer a copy of the verification or judgment; and
A statement that, upon the consumer’s 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.

Proposed Debt Validation Notice Requirements

To address perceived inadequacies in the processes relating to validation and verification, the Bureau has proposed Section 1006.34 to clarify what validation information debt collectors must provide to consumers.

First, the Proposed Rule would clarify that a debt collector may satisfy the initial disclosure requirement by sending a consumer a validation notice that satisfies the delivery requirements of proposed Section 1006.42(a): (1) in the initial communication; or (2) within five days thereafter. However, as under Section 809(a), the disclosure requirement does not apply if the consumer has paid the debt prior to the time the notice is required to be sent. As these provisions are largely consistent with the statute, they do not appear to present significant challenges for implementation.

Second, the Proposed Rule would require the validation information to be “clear and conspicuous,” which the CFPB would define consistent with how that term is used in other consumer financial services laws and implementing regulations. Accordingly, for a disclosure to satisfy the standard, it would have to be: (1) readily understandable; (2) for a written or electronic disclosure, in a location and type size that are readily noticeable to consumers; and (3) for and oral disclosure, given at a volume and speed that are sufficient for a consumer to hear and comprehend it.

Third, the Proposed Rule would require a debt collector to include in the validation notice information about the debt that would be sufficient to enable the consumer to identify, and determine whether they owe, the debt. Specifically, such information would include:

the consumer’s name and mailing address, which would have to be the most complete information the debt collector obtained from the creditor or another source;
the name of the creditor, which the CFPB proposes to make the creditor as of the itemization date;
the account number;
the amount of the debt;
information about consumer protections, including the right to dispute a debt and to request the name and address of the original creditor, as provided under Section 809(b) of the FDCPA; and
a consumer response form that a consumer may use to exercise such rights (e.g., submitting a dispute or requesting original creditor information), which would include express elective statements that a consumer could use to ensure that debt collectors provide the appropriate information.

Fourth, to comply with the validation disclosure requirements of Section 809(a) of the FDCPA and 12 C.F.R. § 1006.34 of the Proposed Rule, the CFPB has proposed a Model Validation Form (B-3). The Bureau would permit a debt collector to adjust the content, format and placement of certain validation information within the model form, provided that the resulting disclosures are substantially similar to the model.

Disclosure of the Amount of Debt

The proposed requirements relating to the amount of the debt are worth note. First, the Proposed Rule would require a debt collector to disclose both: (1) the current amount of the debt; and (2) the amount of the debt as of the “itemization date.” The amount would have to be presented in tabular format, and reflect interest, fees, payments, and credits (or, if applicable, a disclosure that no interest, fees, payments, or credits were assessed or applied to a debt). The Bureau has requested comment on whether the itemization should be more detailed, whether itemization is practicable for all categories of debt, and whether the proposed itemization would cause conflicts with other applicable laws and requirements.

Second, the Proposed Rule would define the “itemization date” as any of the following reference dates on which the debt collector can ascertain the amount of the debt: (1) the last statement date; (2) the charge-off date; (3) the last payment date; or (4) the transaction date; Notably, while the Proposed Rule would allow a debt collector flexibility in determining which reference date to choose as the “itemization date,” it would require a debt collector to use the same date consistently for disclosures for that same consumer, to ensure that changes in the reference do not undermine the Bureau’s purpose of providing clear and consistent information in disclosures under proposed Section 1006.34. Additionally, debt collectors would have to take care to identify the creditor as of the chosen itemization date. The CFPB has requested comments on whether: (1) the proposed definition of “itemization date” will facilitate disclosure, (2) would capture all debt types; (3) whether additional clarification is needed; and (4) whether the potential reference dates should be ordered in a hierarchy in order to improve consumer understanding of the required disclosures.

Third, the Proposed Rule includes special disclosure requirements for the amount of the debt for debt collectors collecting mortgage debt that is subject to Regulation Z, 12 C.F.R. § 1026.41. Given that that regulation requires the delivery of regular periodic statements that includes itemized fee information, the CFPB’s proposal reflects that for such loans the “amount of the debt” information that would otherwise be required under the Proposed Rule would already be delivered to consumers. Accordingly, the Proposed Rule would permit a debt collector collecting a mortgage debt subject to the periodic statements requirement of Regulation Z a copy of the most recent periodic statement provided to the consumer at the same time as the validation notice, and refer to the periodic statement in the notice, in order to satisfy the itemization requirement. In doing so, the Proposed Rule would provide flexibility to mortgage servicers in complying with the “amount due” itemization requirement. The Bureau is requesting comment on how this exemption would apply to servicers exempt from the periodic statement requirement (e.g., for borrowers in bankruptcy). However, we note that the periodic statement requirements also do not apply to open-end and reverse mortgage loans. Thus, it appears that servicers of open-end and reverse mortgage loans would not be given the same flexibility in complying with the “amount due” itemization requirement. In addition, it is unclear whether the provision of a periodic statement, in lieu of the itemized amount due, could create borrower confusion to the extent the amount listed on the periodic statement materially differs from the “current amount of the debt,” which must continue to be disclosed.

Proposed Validation Period Requirements

In addition to the validation notice requirements discussed above, Section 809 of the FDCPA requires a debt collector to satisfy certain requirements if a consumer, within the 30-day validation period: (1) disputes a debt; or (2) requests the name and address of the original creditor. To ensure that consumers can take advantage of this protection, the Proposed Rule would require a debt collector to disclose to a consumer the date on which the verification right expires (i.e., the date on which the 30-day period ends).

The Proposed Rule would define the validation period as beginning on the date on which a debt collector provides the validation information, and ending 30 days after the consumer receives or is assumed to receive such information. Under the Proposed Rule, the latter date would be any date that is at least five business days (excluding Saturdays, Sundays, and legal public holidays) after the debt collector provides the validation information. If a consumer does not receive the original validation notice, and the debt collector sends a subsequent notice, the Proposed Rule would calculate the validation period from the date of receipt (or assumed receipt) of the subsequent notice.

The Bureau is seeking comment on how debt collectors determine the end of the validation period, and on whether the timing presumption should be modified (including to account for differences in mail versus electronic delivery).

Proposed Provisions Relating to Translation of Disclosures

To address concerns regarding LEP consumers, the Proposed Rule would include provisions relating to the translation of information from validation notices.

Specifically, the Bureau proposes to permit a debt collector to include in a validation notice optional information (in Spanish) on how a consumer may request the notice in Spanish, if the debt collector chooses to provide a Spanish-language translation. To determine the potential impact of this provision, the CFPB has requested comments on: (1) debt collectors’ current Spanish-language, and other non-English language, collection activities; (2) examples of supplemental Spanish-language instructions to request a translated validation notice; and (3) the benefits and risks of such an approach.

Further, the Proposed Rule would allow a debt collector to provide a translation of the validation notice in any language other than English if the debt collector: (1) also sends an English-language validation notice in the same transmittal; or (2) previously sent an English-language validation notice. This provision of the proposal recognizes, but does not mirror, obligations that may arise under state law regarding the provision of translated documents to LEP consumers. By declining to mandate multiple translations, the Bureau’s proposal would avoid imposing significant costs on debt collectors who may not deal with significant LEP populations. However, the Bureau is seeking comment on whether a debt collector should be required to provide a translated non-English validation notice (in a language other than Spanish) at the request of the consumer. Such a requirement could expand the cost of compliance with the Proposed Rule, particularly for debt collectors whose exposure to LEP consumers is more limited.

Electronic Disclosure Requirements

To recognize the role that electronic communications play in debt collection activities, the Proposed Rule would:

Permit debt collectors to include electronic contact information (website and email address) in the validation notice;
If a debt collector sends a validation notice electronically, require the debt collector to include a statement regarding how a consumer can take responsive actions (e.g., disputing the debt) electronically, and permit the debt collector to include such information in a disclosure that is not provided electronically;
Require a debt collector to provide required disclosures in a manner that is reasonably expected to provide actual notice and in a form that the consumer can keep and access later; and
If a debt collector provides required disclosures electronically, mandate compliance with the federal E-SIGN Act or equivalent processes.

The Bureau is giving particular consideration to how consumers might respond to electronic validation notices. Specifically, the Proposed Rule considers how a debt collector may include prompts and hyperlinks in validation notices to facilitate consumer responses. The former director of the Federal Trade Commission’s Bureau of Consumer Protection, David Vladeck, recently published an opinion article in which he highlighted several cybersecurity concerns related to the permissible use of hyperlinks under the Proposed Rule. Specifically, the former director noted that:

Encouraging use of hyperlinks by unknown parties undermines government warnings about the risks of doing so and exposes consumers to criminal exploitation. Scammers pushing links with viruses, malware, and identity theft scams are almost certain to impersonate debt collectors. Consumers will face a catch-22: Click and risk a virus or a scam, or don’t click and miss potentially legitimate information about why a debt collector is going after you and how to dispute the debt.

In light of the risks highlighted by the former director, and other consumer advocates, it is unclear whether the Proposed Rule’s provisions on the use of hyperlinks will make their way into a Final Rule.

Takeaway

While the Proposed Rule would provide debt collectors some flexibility in determining how to comply with the validation notice requirements, the scope of issues on which the Bureau has requested comment in connection with these provisions leaves open the possibility that the new requirements could be significantly more burdensome to implement. As parts four and five of this blog series will discuss in greater depth, the final requirements that the Proposed Rule would impose, and its nuances, are important to note for debt collectors.

Recent Cases Deepen the Divide Among Circuits on Standing to Sue for Violations of FACTA

August 27, 2019 By Chris Riley

A&B Abstract:

Recent cases by the Eleventh Circuit and the D.C. Circuit deepen the divide among the courts on the standing of consumers to sue for violations of the Fair and Accurate Credit Transactions Act (“FACTA”). In Muransky v. Godiva Chocolatier, Inc., 922 F.3d 1175 (11th Cir. 2019) and Jeffries v. Volume Services of America, 2019 WL 2750856 (D.C. Cir. July 2, 2019), the courts of appeal have held that the consumer plaintiff had Article III standing under the Supreme Court’s decision in Spokeo, Inc. v. Robins to sue retailers for violation of FACTA’s truncation requirement. FACTA prohibits retailers from printing “more than the last 5 digits of the credit card number or the expiration date” on the consumer’s receipt. Prior decisions from the Second, Third, Seventh and Ninth Circuits held that the consumer plaintiff lacked standing to sue the retailer for a violation of FACTA’s truncation requirement absent a resulting tangible injury.

Discussion:

In Muransky, the Eleventh Circuit recently vacated and reissued an earlier ruling holding that a plaintiff had standing under Spokeo to pursue a putative class action for violation of FACTA’s truncation requirement. In Muransky, the retailer printed a receipt with the plaintiff’s first six and last four digits of his credit card. After a short period of discovery, the parties settled the case for $6.3 million. During the approval process, a class member objected to the settlement on the basis that the plaintiff suffered no harm, and class members who had their identities stolen would have their claims barred. After the district court approved the settlement, the objector appealed.

On appeal, in addition to the objector’s challenge, an amicus brief was filed on behalf of the National Retail Federation, the U.S. Chamber of Commerce, and the International Franchise Association. These groups argued that plaintiff’s lawyers had “weaponized” FACTA in recent years to force defendants to settle class actions “despite the absence of any actual harm or risk of harm.” The groups noted recent, significant FACTA class action settlements in the Eleventh Circuit ranging from $2.5 million to $30.9 million.

The Eleventh Circuit affirmed the district court’s approval of the settlement, and rejected the challenge to the plaintiff’s standing. The court recognized that prior courts in the Second, Third, Seventh and Ninth Circuits had held that consumers lacked standing to pursue lawsuits for violation of FACTA’s truncation requirement, absent some tangible injury. In Kamal v. J. Crew Group, Inc., 918, F.3d 102 (3d Cir. 2019), the Third Circuit affirmed the dismissal of the consumer’s putative class action. The Third Circuit held that printing the first six and last four digits of the credit card, without any additional degree of risk, was “a bare procedural violation” that does not create Article III standing.

The decision in Kamal was consistent with prior decisions from the Second Circuit (Crupar-Weinmann v. Paris Baguette Am., Inc., 861 F.3d 76 (2d Cir. 2017)), Seventh Circuit (Meyers v. Nicolet Restaurant of De Pere, LLC, 843 F.3d 724 (7th Cir. 2016)), and Ninth Circuit (Bassett v. ABM Parking Services, Inc., 883 F.3d 776 (9th Cir. 2018)). Each of those cases involved a violation of the FACTA truncation requirement involving the printing of the credit card expiration date on the receipt. In each case, the court held that the plaintiff lacked standing to sue.

Even more recently, in Jeffries, the D.C. Circuit followed the reasoning of the Eleventh Circuit in Muransky to reverse the district court’s dismissal of a consumer’s putative class action for violation of FACTA’s truncation requirement on standing grounds. In that case, the retailer had printed all 16 digits of the plaintiff’s credit card number and the expiration date of the card on the receipt. These facts were important because the D.C. Circuit recognized that “not every violation of FACTA’s truncation requirement creates a risk of identity theft” sufficient to constitute a concrete injury in fact. The court specifically cited with approval the expiration date cases from the Second, Seventh and Ninth Circuits, noting that the mere technical violation of printing the expiration date did not create a risk of identity theft triggering a concrete injury in fact. However, the D.C. Circuit held that the “egregious” FACTA violation of printing all 16 digits and the expiration date created a real risk of harm to the plaintiff because it provided all of the information necessary for a criminal to defraud the plaintiff.

Takeaways:

First, the procedural posture of Muransky and the “egregious” facts in Jeffries may have helped lead to their respective results.

In Muransky, the retailer did not challenge the plaintiff’s standing in the district court. Rather, the standing challenge came from an objector to the settlement of the putative class action. Thousands of class members had already made claims in the settlement, and the court was likely disinclined to unwind such a settlement due to a single objector. Regardless, Muransky is nonetheless the law in the Eleventh Circuit, and district courts will be bound to follow it. Muransky will only increase the already significant number of FACTA class actions brought in that jurisdiction.

In Jeffries, the retailer had printed all 16 digits of the plaintiff’s credit card number and the expiration date of the card on the receipt. In finding standing, the D.C. Circuit noted the “egregious” nature of the FACTA violation. Therefore, less “egregious” violations of FACTA can be distinguished from Jeffries, such that the D.C. Circuit may not necessarily become a safe haven for FACTA lawsuits.

Second, the divide among the courts of appeal continues to justify the Supreme Court clarifying the scope of Spokeo.

A Closer Look at the CFPB’s Proposed Debt Collection Rules – Part Two: Communications

August 22, 2019 By Consumer Finance Team

A&B Abstract:

This blog post is part two of a five-part series examining the Consumer Financial Protection Bureau’s (the “CFPB” or “Bureau”) proposed rule amending Regulation F (the “Proposed Rule”), which implements the Fair Debt Collection Practices Act (“FDCPA”) to prescribe rules governing the activities of debt collectors.

This post summarizes the key provisions of the Proposed Rule relating to debt collector communications with consumers. These include communications-related provisions regarding:

Electronic communications safe-harbor;
Opt-out notice requirement;
Time and place restrictions;
Workplace email addresses;
Social media platform communications;
Communication media restrictions;
“Limited-content” messages; and
Telephone call frequency limits.

This post also describes potential issues with certain communications provisions of the Proposed Rule, including uncertainty in scope, application, and operational considerations. The Bureau is currently accepting public comment on the Proposed Rule.

Electronic Communications Safe-Harbor

The FDCPA generally provides that debt collectors may not, without the prior consent of the consumer, communicate in connection with the collection of any debt with any person other than the consumer (15 USC 1692c). However, in the event a debt collector unintentionally violates this rule, FDCPA section 813(c) provides that a debt collector can avoid liability by showing that the violation was not intentional, resulted from a bona fide error, and that it occurred even though the debt collector maintained reasonable procedures designed to avoid the error.

The Proposed Rule applies these concepts expressly to electronic communications, and provides a 3rd-party communication “safe harbor” (12 CFR 1006.6(d)(3)) that sets forth procedures for debt collectors to avoid liability when they unintentionally communicate with an unauthorized third party about a consumer’s debt when trying to communicate with the consumer by email or text message.

This safe harbor would apply when a debt collector maintains procedures that are “reasonably adapted” to avoid an error in sending an email or text message that would result in a violation of the FDCPA’s prohibition against unauthorized 3rd party communications. Specifically, such procedures must include steps to “reasonably confirm and document” that the debt collector electronically communicated with the consumer using one of 3 types of contact information:

An email address or phone number that the consumer recently used to contact the debt collector for purposes other than opting out of electronic communications; or
A non-work email address or a non-work phone number, if the debt collector notified the consumer that it might use that email address or phone number for debt collection communications (and provides certain other disclosures set forth in the rule); or
A non-work email address or a non-work phone number that the creditor or a prior debt collector obtained from the consumer to communicate about the debt if, before the debt was placed with the collector, the creditor or prior collector recently sent communications to that email address or phone number, and the consumer did not request that such address or number cease being used.

The debt collector must also have taken additional steps to prevent communications using an email address or phone number that the debt collector knows has previously led to an unauthorized disclosure to a 3rd party.

Notably, to be protected from liability under this safe harbor, a debt collector would need to show, by a preponderance of the evidence, that the debt collector’s disclosure to the third party was unintentional and that the debt collector did, in fact, maintain the specified procedures.

There are potential issues with this proposal however. For example, it is unclear how Regulation F’s rules regarding electronic communications would interact with other communication regulations such as the Telephone Consumer Protection Act (“TCPA”). It would be helpful for the CFPB to provide guidance on whether Regulation F is meant to supersede TCPA requirements to the extent they are inconsistent. It is also unclear how the CFPB views alternative communication channels such as app-based (push) notifications. That is, would these notifications be treated the same as text messages or emails? Or like phone calls? Or some separate standard since the consumer may be granting authorization when they install the app?

Opt-Out Notice

The Proposed Rule also includes an “opt-out notice” rule (12 CFR 1006.6(e)) which requires that emails, text messages, and other electronic communications include clear and conspicuous instructions for how the consumer can opt-out of receiving such communications.

This rule was designed to limit the frequency of electronic communications sent by debt collectors (since the telephone call frequency limit described in 12 CFR 1006.14(b) wouldn’t apply to emails or text messages), and also to limit any associated costs such communications might impart to consumers. This rule would also prohibit debt collectors from conditioning the opt-out on the payment of any fee or the consumer providing any information other than the email address or phone number they are opting-out.

One potential area of uncertainty regarding the opt-out requirement is what form the opt-out procedure must actually take. That is, while the rule states that the procedure must be described in electronic communications, and the CFPB has noted that a consumer should be able to, “with minimal effort and cost, stop the debt collector from sending further written electronic communications,” the Proposed Rule does not specify any standard for what the collector’s opt-out procedure must look like in terms of the specific steps the consumer must take to opt out. For instance, can a debt collector require that opt-out requests be in writing? Or can they require consumers to call a certain phone number? And would the customer be required to specify one or all electronic communications be subject to the opt-out? The CFPB has requested comments on this proposed rule that may provide insight on these questions.

Time and Place Restrictions

The FDCPA prohibits debt collectors from communicating or attempting to communicate with consumers at times or places that the collector “knows or should know” are inconvenient. The Proposed Rule regarding time and place restrictions (12 CFR 1006.6(b)(1)) clarifies that calls to mobile phones, as well as text messages and emails, are subject to this prohibition. The CFPB interprets this prohibition to mean that a time before 8:00 a.m. and after 9:00 p.m. local time at the consumer’s location is per se inconvenient, unless the debt collector has knowledge of circumstances to the contrary.

Moreover, the CFPB’s commentary on this proposed rule seeks to clarify two points of ambiguity in the FDCPA rule. First, the CFPB notes that, for purposes of determining the time of an electronic communication under this rule, a communication occurs when the debt collector initiates or sends it, not when the consumer receives or views it. Second, the rule would provide a safe harbor where a debt collector has conflicting or ambiguous information regarding a consumer’s location, such as phone numbers with area codes located in different time zones, or a phone number with an area code and a physical address that are inconsistent. Specifically, under this proposal, the debt collector would not violate the prohibition on communicating at inconvenient times if it communicated with the consumer at a time that would be convenient in all of the locations where the debt collector’s information indicated the consumer might be located. For example, in the time zones related to a consumer’s residence, as well as their mobile phone area code.

However, there are also potential issues with this proposed rule. The first is that the “knows or should know” standard is subjective, and it would be very difficult for debt collectors to interpret subjective consumer statements regarding when and where they do not want to be contacted. For example, if a consumer tells the collector not to communicate with them “at school,” it is unclear what period of time that would cover, since a consumer might only attend classes at night or on certain days of the week. Similarly, it is unclear how debt collectors should approach contacting servicemembers on active duty; that is, where a creditor or debt collector has received active duty orders as part of a request for protections under the Servicemember’s Civil Relief Act, should the debt collector assume that any communication with a servicemember is inconvenient while on active duty? Or is the presumption in favor of attempting to communicate with such servicemembers to notify them of potential issues with their accounts, assuming such contact is made between 8:00 a.m. and 9:00 p.m. local time where the servicemember indicated they are based?

A second issue arises where debts are assigned or transferred. The proposed rule states that a collector should know that communications at any times or places previously identified by the consumer as inconvenient are prohibited. This would place a substantial burden on creditors and servicers to transfer that information along as debts are assigned or transferred during the debt collections process.

Workplace Email Addresses

Regulation F also proposes a rule regarding communications to a consumer’s workplace email address (12 CFR 1006.22(f)(3)). Under this proposed rule, debt collectors are prohibited from contacting a consumer using an email address that the debt collector knows or should know is provided by the consumer’s employer, unless the debt collector has received either: (i) prior consent to use that email address, or (ii) an email from that email address, directly from the consumer. However, a consumer’s prior consent to receive email on their work account from a creditor would not transfer to a debt collector.

The CFPB explained that emails are prohibited where the debt collector can reasonably anticipate that they might be opened and read by someone other than the consumer, and warned that that many employers have a legal right to read messages sent or received by employees on their work email accounts.

We believe the CFPB should provide clarification on several aspects of this proposed rule, including:

the circumstances under which a debt collector would be deemed to “know or should know” that the debt collector is emailing a consumer’s work email address and, if so, what circumstances should indicate to a debt collector that an email address is a work email address;
what, exactly, constitutes prior consent? For example, if a consumer provides a work email address on their loan application, it is unclear whether that would be considered consent, or whether additional disclosures or consents would be required; and
whether this rule would apply only to email contacts with the actual person obligated to pay a debt, or whether it should be broadened to apply to such person’s spouse, parent, guardian, or executor, since the proposed definition of “consumer” under 12 CFR 1006.6(a) includes such persons.

Moreover, because this proposed rule prohibits workplace emails when the debt collector knows that the employer bars its employees from receiving them, this would impose a significant burden on debt collectors since, in order to comply with this requirement, they would need to maintain a database of employers who prohibit such communications, and then block communications to emails on that list.

Social Media Platforms

Regulation F also proposes a rule regulating debt collectors’ communications through social media (12 CFR 1006.22(f)(4)). This proposed rule would prohibit a debt collector from communicating with a consumer in connection with the collection of a debt via social media platform, if such communication is viewable by a person other than the consumer (or certain other persons exempted from this rule).

The CFPB noted that this rule aims to prevent: (1) unauthorized communications with 3rd parties, (2) consumer privacy violations, and (3) harassing, oppressing, or abusing consumers.

It is presumed, though not expressly provided in the text of the proposed rule, that social media communications that are not viewable by third parties, such as those sent through private messaging functions, are not prohibited by this rule. However, there is some risk in this presumption because although such private messages are typically meant only for the targeted individual, it is possible they could be seen or heard by third parties, such as employers or family members, as is the case with other forms of communication (like voicemails). It remains to be seen how the CFPB will reconcile this. One approach to avoid this issue might be for debt collectors to limit the content of such messages to what is permitted under the proposed “limited-content message” definition, described below. However, it is also unclear if such limited-content messages sent via social media – whether public or private – would be deemed “communications” for purposes of the social media communication restrictions, as opposed to in the voicemail context, since the message would likely contain information identifying the sender, as is the case with email.

Communication Media Restrictions

The Proposed Rule’s “prohibited communication media” provision (12 CFR 1006.14(h)) would prohibit debt collectors from communicating with a consumer through any medium that the consumer has requested the debt collector not use. The CFPB explained that once a consumer has requested that a debt collector not use a specific medium to communicate with them, it may be considered harassment, oppression, or abuse of the consumer for the debt collector to continue using that same medium.

There are, however, two exceptions to this rule: First, if a consumer opts out of receiving electronic communications from a debt collector in writing, the debt collector may reply once to confirm the consumer’s request to opt out, provided that the reply contains no information other than a statement confirming the consumer’s request. Second, if a consumer initiates contact with a debt collector using an address or a phone number that the consumer previously requested the debt collector not use, the debt collector may respond once to that consumer-initiated communication (though it is unclear what, if any, restrictions apply to that one response).

A potential issue with implementing this rule is that there may be circumstances where applicable law requires the debt collector to communicate with the consumer only through one specific medium, and does not offer an alternative medium that would be compliant. The Bureau has requested comment with regard to such laws, and whether additional clarification is needed regarding the delivery of legally required communications through a specific medium of communication where the consumer has requested that the debt collector not use that medium.

Limited-Content Message

One of the more interesting and noteworthy proposals under Regulation F is the creation of a “Limited-Content Message” safe harbor, which may resolve the long-standing “Voice Mail Paradox.”

By way of brief background, the voicemail paradox emerged due to the conflict between, on the one hand, the FDCPA requirement that debt collectors provide – in “communications” with consumers – a “mini-Miranda” disclosure identifying themselves as debt collectors, and on the other hand, the FDCPA prohibition against disclosing debt information to 3rd parties. For example, if a debt collector provides no mini-Miranda disclosure in a voicemail message to a consumer when required, it would expose itself to liability; but at the same time, if the debt collector did provide the mini-Miranda disclosure in the voicemail, and a third party overhears that information, the rule prohibiting 3rd party communication may be violated. Federal courts are currently split on how to resolve this issue.

This proposed definition of “Limited-Content Message” (12 CFR 1006.2(j)) provides a possible resolution to the paradox because the limited-content message would not, by definition, be considered a “communication” at all; and therefore, no mini-Miranda disclosure would be required under the FDCPA, and if the message was seen or heard by a third party, it would not constitute a prohibited third-party disclosure.

Specifically, the proposed limited-content message must include all of the following: the consumer’s name, a request that the consumer reply to the message, the name or names of one or more natural persons whom the consumer can contact in reply, a telephone number that the consumer can use to reply, and, if delivered electronically, a disclosure explaining how the consumer can opt-out from receiving such messages.

Additionally, a limited-content message may optionally include one or more of the following: a salutation, the date and time of the message, a generic statement that the message relates to an account, and suggested dates and times for the consumer to reply to the message. Under the CFPB’s interpretation, none of these items, individually or collectively, would convey that the consumer owes a debt or other information regarding a debt.

The CFPB has requested comment on numerous aspects of the limited-content message proposal, including:

whether any of the content permitted under this proposed rule should, in fact, be interpreted as conveying information regarding a debt;
whether allowing a limited-content message to include a generic statement that the message relates to an “account” raises a risk that the message would convey information about a debt to a third party, or whether there is an alternative statement that would minimize such risk; and
whether there is sufficient information required or permitted in the limited-content message to prompt consumers to respond, and if not, what additional information could be included in the message that would not cause the message to constitute a “communication.”

While this safe harbor does present a potential resolution to the voicemail paradox, there has been some industry concern over whether consumers will be less likely to respond to limited-content messages when they don’t know the name of the company trying to reach them. That is, even if the agent provides their personal name as required under the limited content message guidelines, the consumer would still not know the company who is trying to reach them, or the purpose of the call, so they may be less likely to respond. This also gives rise to a concern over whether consumers who do return these calls will complain of being misled or deceived when they return the call and find out it was a debt collection call.

It is also unclear how caller ID functions may have an impact on the limited-content message provisions, since caller IDs may display the debt collection agency’s name, and such information would fall outside of the limited content permitted under the proposed rule. Notably, limited-content messages are not permitted via email, because the sender’s email address may disclose its identity, so it is not clear why a caller ID identification would be treated differently. Moreover, it is unclear how the limited-content message safe harbor would interact with state laws that require certain disclosures be contained in all debt collector communications with consumers. It is possible that industry comments – which are currently being submitted to the CFPB – may address these concerns.

Telephone Call Frequency Limits

Finally, Regulation F also proposes a rule limiting the number of telephone calls a debt collector may place to a consumer about a particular debt, and making a violation of such limit a per se violation of the FDCPA’s prohibition on repetitive or continuous calling, and the Dodd-Frank Act’s UDAP provisions (12 CFR 1006.14(b)). Specifically, this call frequency limit would prohibit debt collectors from:

calling a consumer about a particular debt more than seven times within a seven-day period; or
engaging in more than one telephone conversation with a consumer about a particular debt within a seven-day period.

Notably, the Bureau does not propose subjecting email, text messages, or other electronic communications to the proposed frequency limits – it would apply only to telephone calls.

There are also certain types of phone calls excluded from the proposed frequency limits which do not count toward, and are permitted in excess of, such limits. In particular:

calls made to respond to a request for information from the consumer;
calls made with the consumer’s prior consent given directly to the debt collector;
calls that are not connected to the dialed number; or
calls with the consumer’s attorney; a consumer reporting agency; the creditor; the creditor’s attorney; or the debt collector’s attorney.

The CFPB has left open several questions regarding the proposed call frequency limits, to which we expect industry participants to respond during the comment period. These include:

whether the frequency limit should be set at seven calls to a particular consumer within seven days, or whether that limit should be higher or lower;
whether the frequency of calls should be measured on a per-week basis as currently proposed, or some alternate time period such as a daily or monthly limit;
whether calls placed about a particular debt to different telephone numbers associated with the same consumer should be counted together in aggregate for purposes of determining whether a debt collector has exceeded the proposed call frequency limit; and
whether the frequency limits should be applied on a per-debt, rather than on a per-consumer, basis. For example, under the current proposed rule, a debt collector who is attempting to collect two debts from the same consumer can permissibly place up to 14 calls in one week to that consumer.

Part 3 of this blog series on Regulation F will address proposed requirements regarding disclosures and other debt collector conduct.

NYDFS Proposes Overhaul to Mortgage Loan Servicer Business Conduct Rules

June 18, 2019 By Consumer Finance Team

The New York Department of Financial Services has proposed significant changes to the mortgage servicer business conduct rules found in Part 419 of the Superintendent’s Regulations. The proposed changes represent the first major changes to Part 419 since its adoption nearly 10 years ago. Some of the significant proposed changes to Part 419 include:

Adding new provisions governing affiliated business arrangements, which would include a requirement that such relationships be negotiated at market rate, restrictions on certain kick-backs and a requirement to provide borrowers with a written disclosure of the relationship;
Restricting a servicer from charging a property valuation fee to a borrower more than once in a 12-month period;
Broadening a servicer’s duty of fair dealing to include ability to repay requirements for loan modifications and that a servicer consider foreclosure alternatives;
Broadening the protections available to delinquent borrowers and borrowers seeking loss mitigation assistance to more closely align with the CFPB’s Mortgage Servicing Rules, including a requirement that acknowledgment notices be delivered more quickly than under the current rules and providing borrowers with additional time to accept or reject a loss mitigation offer; and
Detailed third party vendor management requirements, which would require a servicer to maintain policies and procedures overseeing third party providers generally and more specific requirements for overseeing counsel and trustees of foreclosure proceedings.

Our June 20 client advisory provides greater detail on the proposed changes to Part 419. In the meantime, we note that the deadline for comment on the proposal is June 29, 2019. Mortgage servicers should take this opportunity to review the proposed changes to Part 419 against their current operations to determine the impact these rules would have if adopted in their current form.